Futures Options Strategy Guide

In this futures and options strategy guide, we are going to explore a handful of basic strategies that beginner and intermediate traders might want to explore in their future and option trading.

Let us start with the most basic of futures and options strategies.

Long and short options and futures trading strategies

1. Long futures/ options:

Let's say trader A anticipates an increase in the price of a certain commodity, or a certain stock’s price. He expects this price increase to last despite volatility. He buys a futures contract that gives him the right to buy at a price that is lower than the market price that he projects/ anticipates. If the price of the commodity or stock falls below the price noted in the contract, then the trader can experience potential losses. But if the price rises, then he potentially gains because he can buy at a price lower than the market price. 

2. Short futures/options:

Trader B anticipates a decrease in the price of a certain commodity or stock’s price, or even a drop in a certain currency’s value. She decides to buy a futures contract that allows her to sell the commodity, stock or currency at a price that is higher than the projected market price. If – against her predictions - prices rally to a higher price than what is listed in the futures contract, the trader could take home potential losses, because they have to sell at a price that is lower than the market price. However, if prices fall, the trader stands to gain because she can sell at a rate that is better than the market price.

Split strike/ synthetic futures and options strategies: 

These strategies are follow-up strategies or strategies that can be used to correct course if a prediction is not playing out in your favour.

3. Synthetic long futures and options 

Trader C has one short put for a lower price and one short call for a higher price. He wants to convert these too long futures/ options (where he has the right to buy or call the commodity or stock in the contract) in anticipation of a price increase. 

Trader C achieves this by purchasing two call options. The price for the call option will be higher than the put option giving the trader the opportunity to earn while also guarding them against a potential price increase. 

Also, one of the newly purchased call options liquidates the short call that the trader is already holding.  He is now left with one long call and one short put at different strike prices.

4. Synthetic short futures and options

Trader C will play the reverse strategy in a situation where he anticipates a price drop after having purchased contracts in anticipation of a price rally. In this case, trader Trader C instead holds a long put for a lower price and long call for a higher price, and wants to convert these to short (where he would have the right to buy - since he anticipates a price drop), he could purchase two put options, where one would cancel out one of the existing long put. The trader is left with one long call and one short put and he has the potential to earn from the pricing difference between the two. Ideally, the put price should be higher than the call price.

Long and short puts and calls

5. Long call: Trader D predicts an imminent large rally in futures prices. In such a case, she decides to buy a call that allows her to buy at a lower price than the high price that she anticipates the market to show very soon. The trader will also usually pay attention to paying a low premium amount for the contract.

6. Short call: Trader D will typically play this move right after the above move, once the market has rallied as expected. The trader expects the price of the underlying security to now consolidate and fall. Meanwhile, premiums on the contract are inflated on account of high activity (thanks to the recent price increase). Trader D sells her call contract at this time, taking home earnings by way of the difference in premium.

7. Long put: After observing a rally in prices of a certain commodity or stock for some time, Trader X is completely sure that prices are due for a correction. He can see clearly that prices are inflated, but he is not sure when the price consolidation will actually come to pass. He buys a long put option for a price that might be lower than the market price but is definitely higher than the market price he anticipates for the stock or commodity in question.

8. Short put: Trader X has held his put option for a period and prices are still showing no chances of coming down. He might want to avoid having to sell at a lower price than the market price. Meanwhile, thanks premiums on contracts might be high on account of high volatility. Trader X can sell his put option at this point so as to at least gain on the premium (provided he paid a lower premium to buy the contract in the first place).

These are only a handful of dozens of futures and options trading strategies that you could try. Start simple and progress as you become comfortable with market intricacies. Understanding market dynamics and factors that affect the pricing of stocks, commodities and currency is vital to trading safely and maybe even profitably.

Remember that all stock market investments - and that includes futures and options trading - is subject to market risk. You should always trade with capital that you are able to set aside after accounting for your daily living expenses. It is always ideal to have a steady income before accepting any risk and yes, always assess your risk appetite before you trade, and choose securities accordingly.