Introduction to Stock Futures Trading
Stock Futures trading is all about making easy money the hard way if you don’t follow a disciplined set of strategies. After all, the strategy is the key to success in stock futures trading. What makes one futures trader successful among so many?
Could it be intelligence? Trading strategies for stocks If that were so, all persons with high IQs would have excelled in stock futures trading. Is it a software programme? If that were the case, programmers would be ruling the roost. Does commodities trading experience translate into successful stock exchange futures trading? Not exactly, otherwise all senior people would be leading stock futures trading. Some may even go to the extent of claiming that inside tips can help you to succeed. Don’t kid yourself.
In today’s world, where globalization has made the world smaller and information travels from one corner to another at lightning speed, it’s not what you know, but how you use it that predicts success at stock futures trading. Find out more about the formula for successful futures trading here.
Stock Futures Trading Strategies
Strategy #1: Long Futures
This strategy is used when you are faced with a bull market and uncertain volatility. Change in volatility will not affect you. But if you have an opinion on where the volatility is headed, another strategy may be a better move.
Strategy #2: Long Synthetic Future
This strategy is also used when one if stock futures trading are bullish on the market and not sure about the volatility. You can trade into this position from a long call or short put position initially to capture the mood of the markets and profit every step of the way.
Strategy #3: Short Synthetic Futures Trading
This one’s a good strategy to follow in a bear market when there is uncertainty about the volatility. It can be traded into from a long put or initial short call position to attain a strong rank in the bear markets.
Strategy #4: Long Risk Reversal
Is it a bear market? Are you uncertain about the volatility? Then the strategy to follow is Long Risk Reversal which has the same risk-reward ratio as Long Futures except for a flat area of lesser or no gain/loss.
Strategy #5: Short Risk Reversal
This strategy can be used in a bear market where there is uncertainty about volatility. This position is generally coupled with another strategy. As can be seen above, risk/reward ratio remains the same as Short Futures except for a flattened area signifying no gain or loss.
Strategy #6: Long Call
When it’s not just a bull market, but a very advanced one at that, Long Call is a strategy of choice. With increasing number of higher strike calls, the strategy should become more bullish.
Strategy#7: Short Call
This is the strategy which really works well in a bear market.
2 choices can be made depending upon your confidence that the markets will slide. Selling out of the money or higher strike puts is the way to go if you have 100% (or great) confidence that markets will fall. However, if you are not sure about whether the market will really fall or just stagnate, choose sell at the money puts strategy.
Strategy #8: Long Put
This is the strategy to follow when the market is very bearish. Greater the out of the money or lower strike the put option strike price, the higher the degree of bearishness that will be manifest in the strategy.
Strategy #9: Short Put trading future
If the futures trader believes the market is more bull than the bear, this is the strategy you need to adopt. Sell out of the money options or lower strike if you are slightly sure and sell at the money options if you are completely confident. If you feel that the market will undergo stagnation and you are bullish, you need to maximize profit through sell in the money options.
Strategy #10: Bull Spread
This is the strategy to use when you feel the market will continue its bull run yet defy the herd mentality to some degree. If you want to benefit from the bull market and you are not sure, this strategy is perfect. This is also the reason for its popularity in futures trading.
Strategy #11: Bear Spread
If you think the bear market will slide further, but not in a massive way, this is the strategy to employ. This is a popular move among bear traders who want to adopt a conservative stance while trading, even when they are less than sure about the future direction of the market.
Strategy #12: Long Butterfly
This strategy works to your benefit in a long-term options series. Traders are advised to enter when the cost of spread is 10% or less than B minus A as seen on the graph above. If a strike is there between A and B, you need to enter when the cost of the spread is double. Theory becomes your best friend and hypothesizing correctly is the key here.
Strategy #13: Short Butterfly
This strategy is used when the market is below point A or above point C in a way that the position is overpriced within a period of a month or so remaining, or when the market nears point B and the move can be in either direction in the short weeks left.
Strategy #14: Long Iron Butterfly
If the market is exactly where it was in the previous strategy and the only difference is that the position is under-priced, the Long Iron Butterfly is the right strategy.
Strategy #15: Short Iron Butterfly
This strategy involves entering the market when the net credit of the Short Iron Butterfly is 80 percent more of C-A and a long period of relative price stability is anticipated where the underlying value will range near the midpoint of C-A at the point of expiration. Make sure you check the theoretical values too.
Strategy #16: Long Straddle
If the market is closer to A and you are not sure where it is heading, more so if it has been less active but indicating the possibility of sudden movement, Long Straddle is the way to go.
Strategy #17: Short Straddle future trading
This one is used when the market is near point A and declining; losses become your gains using this strategy
Strategy #18: Long Strangle
If the market is close to or within the A-B range and stagnating and explodes, either way, money can be made. But if the market remains in a stagnant position, cut your losses using this strategy. Even if implied volatility is expected to rise, this is a good strategy to use.
Strategy #19: Short Strangle
If the market is within or close to A-B range and is quietening down though still active, hop on to the gravy train with the short straddle and reach the destination you always wanted to, financially.
Strategy #20: Ratio Call Spread
When the market is close to point A in the above graph and a moderate to slight but there is a chance for a sell-off. Upside risk makes this strategy only usable when there is more than two excess shorts or 1:3.
Strategy #21: Ratio Put Spread
This makes sense when the market is near position B and though there is an expectation that the market will fall somewhat, there is a chance for a sharp rise. This strategy is seldom done more than two excess shorts on account of downside risk.
Here are some articles that will help you to get more detail about the Stock Futures Trading so just go through the link.
- Yield Spread- Important Things You Should Know? (In Detail)
- Best Steps: Simplifying Derivatives
- Top 5 differences between Mutual Fund vs Exchange Traded Fund
- 23 Important Things You Should Know in Futures Trading
- Is Stock Trading Right for You? Pros and Cons
- Amazing Guide on Types of Mutual Fund (Futures Guide)