25 Futures Trading Basic Strategies that work

25 Futures Trading Basic Strategies that work

Many people enter the trading world looking for futures trading strategies. That’s because they have heard you can make good money in these markets.  For the people who treat trading like a professional, they do have a shot at making money while the opposite is true for those who treat it like a hobby.

The most-often used trading strategies in the futures markets are pretty simple. You buy if you think prices are going up or sell if you think prices are going down. And, in futures trading, selling first is just as easy as buying first. The positions are treated equally from a regulatory point of view.

In this article, the 25 strategies are not to provide a complete guide to every possible trading strategy. Instead, it will provide a starting point. Whether the contents will prove to be the best strategies and follow-up steps for you will depend on your knowledge of the market, your risk-carrying ability and your commodity trading objectives.

10 Futures Trading Basic Strategies that work infographic

  1. Long Futures

This is when you are bullish on the market and uncertain about volatility. You will not be affected by volatility changing. However, if you have an opinion on volatility and that opinion turn out to be correct, one of the other strategies may have greater profit potential and/or less risk.

Its profit characteristics are profit increases as market rises. Profit is based strictly on the difference between the exit price and the entry price. Whereas, its loss characteristics are loss increases as market falls. Loss is based strictly on the difference between the exit price and the entry price.

  1. Short Futures

This is when you are bearish on the market and uncertain about volatility. Likewise, you will not be affected by volatility changing. However, if you have an opinion on volatility and that opinion turns out to be correct again, one of the other strategies may have greater profit potential and/or less risk.

This strategy’s profit and loss characteristics are exactly the opposite of long futures. Profit increases as market falls. Profit is based strictly on the difference between the entry price and the exit price. Whereas, loss increases as market rises. Loss is based strictly on the difference between the entry price and the exit price.

  1. Long Synthetic Futures

Same as long futures, it is when you are bullish on the market and uncertain about volatility. It will not also be affected by volatility changing. This strategy may be traded into from initial long call or short put position to create a stronger bullish position.

  1. Short Synthetic Futures

Same as short futures, it is when you are bearish on the market and uncertain about volatility. It will also not be affected by volatility changing. This strategy may be traded into from initial short call or long put position to create a stronger bearish position.

  1. Long Risk Reversal

Known as “squash or combos”, this position is normally initiated as a follow-up to another strategy. Its risk/reward is the same as a LONG FUTURES except that there is a flat area of little or no gain/loss.

Profit increases as market rises above the long call strike price while loss increases as market falls below the short put.

  1. Short Risk Reversal

Same as long risk reversal, this is also known as “squash or combos”. This position is exactly the same as the long risk as far as another strategy is concerned. On the other hand, its risk/reward is the same as a SHORT FUTURES except that there is a flat area of little or no gain/loss.

Contrary to long risk reversal, profit increases as market falls below the long put strike price. Whereas, loss increases as market rises above the short call.

  1. Long Call

This is when you are bullish to very bullish on the market. In general, the more out-of-the-money (higher strike) calls, the more bullish the strategy.

  1. Short Call

On the other hand, this is when you are bearish to very bearish on the market. Sell out- of-the-money (higher strike) puts if you are less confident the market will fall, sell at-the-money puts if you are confident the market will stagnate or fall.

  1. Long Put

Same as the short call, this is when you are bearish on the market. Generally, the more out-of-the-money (lower strike) the put option strikes price, the more bearish the strategy.

  1. Short Put

This is when you firmly believe the market is not going down. Sell out-of-the-money (lower strike) options if you are only somewhat convinced.

On the other hand, sell at-the-money options if you are very confident the market will stagnate or rise. If you doubt market will stagnate and are more bullish, sell in-the-money options for maximum profit.

  1. Bull Spread

This is when you think the market will go up, but with limited upside. This is a good position if you want to be in the market but are less confident of bullish expectations. You’re in good company as this is the most popular bullish trade.

  1. Bear Spread

On the other hand, this is when you think the market will go down, but with limited downside. This is also a good position if you want to be in the market but are less confident of bearish expectations.

This is the most popular position among bears because it may be entered as a conservative trade when uncertain about bearish stance.

See Also: Bear Markets: 4 Ways to Ride Out the Storm

Stock trading including futures

  1. Long Butterfly

This is one of the few positions which may be entered advantageously in a long-term options series. Enter when, with one month or more to go, cost of the spread is 10 percent or less of B – A.

  1. Short Butterfly

This is when the market is either below A or above C. Also, this is when position is overpriced with a month or so left. Or when only a few weeks are left, market is near B, and you expect an imminent move in either direction.

  1. Long Iron Butterfly

Same as the short butterfly, this is when the market is either below A or above C. Also, the position is under-priced with a month or so left. Or when only a few weeks are left, market is near B, and you expect an imminent breakout move in either direction.

  1. Short Iron Butterfly

You should enter when the Short Iron Butterfly’s net credit is 80 percent or more of C – A. Also, you anticipate a prolonged period of relative price stability. With this, the underlying will be near the mid-point of the C – A range close to expiration.

  1. Long Straddle

This is when the market is near A and you expect it to start moving. However, you are not sure which way. This is especially a good position if market has been quiet, then starts to zigzag sharply, signaling potential eruption.

  1. Short Straddle

This is when the market is near A and you expect market is stagnating. Because you are short options, you reap profits as they decay — as long as market remains near A.

  1. Long Strangle

This is when the market is within or near (A-B) range and has been stagnant. If market explodes either way, you make money.

On the other hand, if the market continues to stagnate, you lose less than with a long straddle. This is also useful if implied volatility is expected to increase.

Financial Market including futures

  1. Short Strangle

On the contrary, this is when the market is within or near (A-B) range and, though active, is quieting down. If market goes into stagnation, you make money. However, if it continues to be active, you have a bit less risk then with a short straddle.

  1. Ratio Call Spread

This is usually entered when market is near A. User also expects a slight to moderate rise in market but sees a potential for sell-off. One of the most common options spreads, seldom done more than 1:3 because of upside risk.

  1. Ratio Put Spread

Same as ratio call spread, this is usually entered when market is near B. You also expect market to fall slightly to moderately, but see a potential for sharp rise. One of the most common options spreads, seldom done more than 1:3 because of downside risk.

  1. Call Ratio Backspread

Normally, this is when market is near B and shows signs of increasing activity, with greater probability to upside.

Profit limited on downside but open-ended in rallying market. Whereas, maximum loss is amount of B – A – initial credit. This loss is less than for equivalent long straddle, the trade-off for sacrificing profit potential on the downside.

  1. Put Ratio Backspread

Also, this is when market is normally near A and shows signs of increasing activity, with greater probability to downside. An example of this is when a last major move was up, followed by stagnation.

  1. Box or Conversion

Occasionally, a market will get out of line enough to justify an initial entry into one of these positions. However, they are most commonly used to “lock” all or part of a portfolio.

They do it by buying or selling to create the missing “legs” of the position. These are alternatives to closing out positions at possibly unfavorable prices.

See Also: Futures and Options: A Quick Comparison

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