4 Popular Futures Trading Strategies

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Updated on Wednesday, February 6, 2019

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Futures are one of the most advanced and sophisticated areas of the public markets, and they’re exciting because of their potential for magnified gains and huge leverage. To get started, you’ll want to know what futures trading strategies are available for futures and what the risks and rewards are.

Futures traders have two big bets they can make: going long (or buying a futures contract) and going short (or selling a futures contract). All other futures trading strategies are based off these two fundamental trades, and traders can create other types of strategies — such as spreads — that reduce risk in certain ways depending on how they think the future’s underlying asset is likely to perform. (If you need a quick review of the futures and commodities market, see Learn How Futures Trading Works.)

Below are four popular futures trading strategies, from the basic to the more complex.

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1. Going long

Going long — buying a futures contract — is the most basic futures trading strategy. An investor buys a futures contract expecting the contract to rise in price by expiration.

Best to use when: Buying a futures contract is the most straightforward futures trading strategy for speculating on an asset rising before the contract expires. The futures contract offers a leveraged return on the underlying asset’s rise, so the trader expects a clear move higher in the near future.

Example of going long: Corn futures trade at $3.50, and you decide to buy five contracts of the commodity, each containing 5,000 bushels. Your broker allows you to have initial margin of $800 on each contract and $700 in maintenance margin. In total, the contracts cost $87,500 (5 * $3.50 * 5,000), but you’ll need only $4,000 in equity to open the position and $3,500 in maintenance margin.

Futures priceLong position’s profit
$3.80$7,500
$3.70$5,000
$3.60$2,500
$3.50$0
$3.40-$2,500
$3.30-$5,000

Risks and rewards: Going long offers the inherent promise of the futures contract: a leveraged return on the underlying asset’s rise. It has uncapped upside as long as the asset rises, making this futures trading strategy a potential home run. In this example, if the contract increases 10 cents to $3.60 (a gain of 2.8%), then your equity stake balloons from $4,000 to $6,500 for a return of nearly 63%. That is, the five contracts are now worth $90,000, and the additional $2,500 is your gain.

Going long also exposes you to leveraged downside. If the underlying asset falls in value, it hits the long futures contract just as hard, and the investor might have to put up more money to hold the position. If the contract declines by 10 cents to $3.40 (a loss of 2.8%), then the equity stake falls from $4,000 to $1,500 for a drop of nearly 63%. With a maintenance margin of $3,500, the broker will quickly ask you to deposit money to bring the account back to the initial margin level.

2. Going short

Going short — selling a futures contract — is the flip side of going long. An investor sells a futures contract expecting the contract to fall by expiration.

Best to use when: Selling a futures contract is another straightforward futures trading strategy, but it can be riskier than going long because of the potential for uncapped losses if the underlying asset continues to rise. Investors going short a contract want the full leveraged returns of an asset that is expected to fall.

Example of going short: Corn futures trade at $3.50, and you decide to sell five contracts, each containing 5,000 bushels. Your broker allows you to have initial margin of $800 on each contract and $700 in maintenance margin. In total, the contracts are worth $87,500 (5* $3.50 * 5,000), but you’ll need only $4,000 in equity to open the position and $3,500 in maintenance margin.

Futures priceShort position’s profit
$3.80-$7,500
$3.70-$5,000
$3.60-$2,500
$3.50$0
$3.40$2,500
$3.30$5,000

Risks and rewards: Going short offers many of the same benefits that going long does, most notably the leveraged return on the underlying asset’s decline. However, unlike the long position, going short has uncapped downside.

In this example, if the contract increases 10 cents to $3.60 (a gain of 2.8%), then your equity stake falls from $4,000 to $1,500 for a loss of nearly 63%. That is, the five contracts are now worth $90,000, and the $2,500 decline is your loss. Because the account no longer meets the maintenance margin, your broker will issue a margin call, and you’ll need to deposit $2,500 to bring the account back to the initial margin level.

Going short exposes you to leveraged upside when the underlying asset falls. If the contract decreases 10 cents to $3.40 (a decline of 2.8%), then your equity soars from $4,000 to $6,500 for a return of nearly 63%. That is, the five contracts are worth $85,000, and the incremental $2,500 is your gain. But your upside is capped since the underlying asset cannot fall below $0. In other words, the most you could make on the short contract is the total value of the short position, which is $87,500 in this example.

3. Bull calendar spread

A calendar spread is a strategy that has the trader buying and selling contracts on the same underlying asset but with different expirations. In a bull calendar spread, the trader goes long the short-term contract and goes short the long-term contract. A calendar spread reduces the risk in a position by eliminating the key driver of the contract’s value — the underlying asset. The goal of this futures trading strategy is to see the spread widen in favor of the long contract.

With a bull calendar spread, traders have multiple ways to win since the spread can widen in a few ways: The long contract can go up, the short contract can go down, the long can go up while the short goes down, the long can go up more than the short goes up, and the long can go down less than the short goes down. The important point is that the spread widens.

Best to use when: The trader must expect the long contract to move up relatively more than the short contract, widening the value of the spread and creating a profit for the trader. A bull calendar spread is a more conservative position that is less volatile than going long. It also requires less margin to set up than a one-leg futures position, and this is a significant advantage of the trade. Plus, this lower margin allows the trader to achieve a higher return on capital.

Example of a bull calendar spread: Expecting corn to rise over the next few months, you buy five September contracts with 5,000 bushels each for $3.50 and sell five December contracts for $3.55. The trade requires initial margin of $500 and maintenance margin of $450 per spread. With five spreads, you need an initial margin of $2,500 and maintenance margin of $2,250.

Net spread (December - September)Bull calendar spread’s profit
$0.15$2,500
$0.10$1,250
$0.05$0
$0-$1,250
-$0.05-$2,500
-$0.10-$3,750

Risks and rewards: The appeal of the bull calendar spread is that you can still earn attractive returns on a conservative strategy with lower margin. That reduced margin helps juice your percentage return.

In this example, the trader earns a nice return on a small widening of the spread. From a starting spread of $0.05, the spread needs to widen just $0.10 (about 3% on a $3.50 price) for the trader to earn $2,500 in profit. With an initial margin of just $2,500, the trade returns a 100% profit on a tiny change in the spread pricing. That’s the appeal of the bull calendar spread.

Of course, if the spread moves $0.10 in the other direction, it will hurt the trade as much as the positive move helped it. If the trade narrows beyond the initial $0.05 spread, the trader begins to lose money. And if that 3% move does happen, the trader will have to raise equity quickly — a full $2,500 to maintain the position.

4. Bear calendar spread

Like the bull calendar spread, the bear calendar spread has the trader buying and selling contracts on the same underlying asset but with different expirations. A calendar spread reduces the risk by neutralizing the key driver of the contract’s value — the underlying asset. In a bear calendar spread, the trader sells the short-term contract and buys the long-term contract. The goal of this futures trading strategy is to see the spread widen in favor of the short contract.

With a bear calendar spread, traders have multiple ways to win since the spread can widen in a few ways: The long contract goes down, the short contract goes up, the long goes down while the short goes up, the long goes down more than the short goes down, and the long goes up less than the short goes up. The important point is that the short September contract becomes more expensive relative to the long December contract.

Best to use when: The trader must expect the short contract to increase relatively more than the long contract, widening the value of the spread and creating a profit. A bear calendar spread is a more conservative position that is less volatile, requiring less margin to set up than a one-leg futures position, and this is a significant advantage of the spread trade. This lower margin requirement allows the trader to achieve a higher return on capital.

Example of a bear calendar spread: Expecting corn to fall over the next few months, you sell five September contracts with 5,000 bushels each for $3.50 and buy five December contracts for $3.55. The trade requires initial margin of $500 and maintenance margin of $450 per spread. With five spreads, you need an initial margin of $2,500 and maintenance margin of $2,250.

Net spread (December - September)Bear calendar spread’s profit
$0.15-$2,500
$0.10-$1,250
$0.05$0
$0$1,250
-$0.05$2,500
-$0.10$3,750

Risks and rewards: The appeal of the bear calendar spread is that you can generate nice returns on a conservative strategy while the broker requires lower margin. This reduced margin helps boost your percentage return on a successful trade.

In this example, the trader earns a nice return on a small move of the spread. From a starting spread of $0.05, the spread needs to fall just $0.10 (about 3% on a $3.50 contract) for the trader to earn $2,500 in profit. With an initial margin of just $2,500, the trade returns a 100% profit on a tiny change in the spread. That’s why traders like the bear calendar spread.

Of course, if the spread moves $0.10 in the other direction, the return will be hit as much as the positive move helped it. If the spread rises beyond the initial $0.05 spread, the trader begins to lose money. If that 3% move does happen, the trader will have to raise equity quickly — a full $2,500 to maintain the position.

Bottom line

With low margin requirements and sometimes-high volatility, futures offer some of the most exciting trading action in the public markets. So it’s no wonder futures trading draws some of the most advanced traders. But it can present some challenges for new traders, and learning key trading strategies is the first step toward establishing a process for successful trading.

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