Stock Future Investing Strategies

Stock futures are becoming more popular and for a good reason too. Stock futures offer the trader many strategies to gain on his or her investment capital. Futures also offer a greater degree of leverage and that means a greater degree of risk, so be careful when trading futures.

Here are few stock future investing strategies:

Intermarket spread

The intermarket spread is by far one of the most educated investing strategies for futures. The great thing about the intermarket spread is that it entails less risk and offers the investor more leeway for better research. For instance, the intermarket spread for the Euro or any major currency deals mainly with the supply side of the currency. With the proper research and head work one can make a good assessment of the trade in order to be profitable with this intermarket spread.

For example, looking at two months, July and December. If historically, December is the lowest price level month for the Euro and there has been much talk within the European Central Bank about raising the supply level of Euros in the market to keep interest rates low then we have an opportunity to make a intermarket trade. In this case, we would sell the December delivery month and buy the July delivery month with the expectation of an increase in supply. The difference between the two delivery months will be our profit so long as July trades above December.

Hedging

If you already are invested in stocks, you may want to hedge your position during uncertain times. This hedging in the futures market is very simple and cost effective. Assuming you own 100 shares of IBM, you could sell one IBM futures contract short for an even hedge. This strategy may be a lot more effective then just buying one put, because the put option will not evenly hedge one for one. That means during times of market turbulence if it is not hedged with a stock futures contract there may be times of dangerous risk exposure.

Ratio spread

A ratio spread allows the trader more flexibility to manage his risk. A ratio spread can be 2:1, 3:2, 4:3, etc. In each case the exposure for the long side or the buy side is one contract, however, this ratio spread allows the trader the option to more risk exposure by letting go of the sell side contracts when the market is expected to rally. The same strategy can be applied for the sell side as a 1:2, 2:3, 3:4 etc.

What's also great about the intermarket and ratio spread strategies is that the margin requirements are dramatically lower than outright futures positions. That means that a lower funded account can take advantage of these strategies and still be profitable in the stock futures markets.

Note, that futures generally have a higher commission rate to trade than actual stocks. That means one should do a cost analysis before trading a ratio spread or intermarket spread that is not expected to have high profit potentials.

 

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