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Long Futures

Overview

Pattern evolution:

Long Futures

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When to use: 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 turns out to be correct, one of the other strategies may have greater profit potential and/or less risk.

Profit characteristics: Profit increases as market rises. Profit is based strictly on the difference between the exit price and the entry price.

Loss characteristics: Loss increases as market falls. Loss is based strictly on the difference between the exit price and the entry price.

Decay characteristics: None.

CATEGORY: Directional
SYNTHETICS: Long put A, short call A

Example

Long Futures Example

Scenario:
This trader feels that Live Cattle futures are poised for a rally. The implied volatility of the options is relatively high, but the trader does not expect it to come down soon. Therefore, he decides to buy one futures contract.

Specifics:
Underlying Futures Contract: April Live Cattle
Futures Price Level: 73.00
Days to Futures Expiration: 75
Days to Options Expiration: 55
Option Implied Volatility: 16.2%
Position: Long 1 Futures

At Expiration:
Breakeven: 73.00 (original futures price)
Loss Risk: Unlimited; losses increase as futures fall.
Potential Gain: Unlimited; profits increase as futures rise.

Things to Watch:
Changes in implied volatility have no effect on this position. If the trader has an opinion on volatility, he may consider another strategy. Another strategy may increase potential profits and/or reduce potential losses. Check the next page for suggested follow-up strategies.

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Additional Futures & Options Strategies

Contents Courtesy of CME Group.