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Understanding Outright Futures Position and its Different Aspects

12 Jul 2023

Introducing Outright Futures Position

Various ways of controlling your risk and chances of profiting emerge through market fluctuations. An outright futures position is a popular method for an unhedged futures trade without market risk. It is approached on a stand-alone basis and is not associated with any significant or complex exchange. 

Let’s try to break it down and understand the different aspects of the outright futures position: 

Breaking Down the Outright Futures Position

Compared to positions that are covered or hedged in some way, the potential reward and risk are higher for outright positions. An outright position in futures trading can be either long or short. When you hold a long position, you make a profit if the price goes up after you buy the contract. Conversely, a short position earns you a profit if the price drops following your transaction. In futures trading, such bets on the direction of price movement are referred to as outright positions.

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The Flip Side of an Outright Futures Position 

An outright futures position is deemed dangerous because there is no safeguard against a negative development. This strategy provides a clear direction for traders, but it does come with exposure to market volatility. An outright futures position, also known as a naked futures position, is popular due to its simplicity and ease of execution.

The Solution to the Problem

Highly liquid futures contracts trades provide some risk reduction. Most traders do not consider it to be risky since it is easy to sell or cover the position back in the market

Reflecting through a Case Study

Let’s say a trader wants to use outright futures contracts to take a position in Company ABC’s stocks. 

In this case, the Position for Long Outright Futures will be:

If Company ABC's shares are currently trading at Rs. 100 per share in the cash market and the futures contracts are trading at Rs. 105 per share, the futures are said to be trading at a premium. This suggests a positive market attitude and mainly an upward price movement. The investor chooses to hold a long outright futures position by purchasing the futures contracts.

Position for Short Outright Futures:

If Company XYZ's shares are currently trading at Rs. 100 per share in the cash market and the futures contracts for Company XYZ are trading at Rs. 95 per share, the futures are said to be trading at a discount. This suggests a negative market attitude and likely a price decline. The investor chooses to acquire a short outright futures position by selling the futures contracts.

Be Wise and Make the Best Bets

In order to make the best investment choices in outright futures trading, investors must carefully consider the state of the market, manage risk, and constantly update their understanding. Investors may make wise selections and perhaps profit from price changes utilising outright futures positions by comprehending the relationship between the cash market price and the futures price. 

Advantages of Outright Futures Position

1. Potential for Profit and Speculation: By taking an outright futures position, investors can make predictions about the course and direction of the price movement of the underlying asset. If their analysis proves correct, they stand to make a potential profit.

2. Leverage and Capital Efficiency: Futures contracts have a low initial margin requirement, which enables traders to hold larger positions than the value of the underlying asset.

3. Easy Capital Allocation: Most exchanges and brokers permit investors to pledge their current holdings to take outright futures contracts. As a result, it is easier to allocate new capital.

4. Liquidity and Flexibility: Futures markets are highly liquid, making it simple for traders to enter and exit positions. This liquidity ensures competitive pricing and reduces the risk of being unable to find a counterparty.

 

Related Articles: How to Make Money In F&O Trading | Know About Future & Options Span Margin Calculator | Everything You Must Know About E-mini Futures | What is Managed Futures Account: Definition and Advantages | 3 Tips for F&O Trading You Must Know

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