Utilizing futures within a portfolio is one potential diversification strategy.
The Benefits of Portfolio Diversification
One of the most important characteristics of any investment portfolio is its diversity. Portfolio diversification helps offset exposure in any single position, and helps investors protect themselves against wide swings in key sectors.
Typically, traders diversify by trading both equities and bonds. But in times of market volatility, futures and options on futures contracts may be an alternative diversification strategy.
Futures and options on futures potentially give market participants the opportunity to hedge against market risk by sector and to raise and lower levels of desired exposure in times of anticipated and unanticipated event-driven volatility.
Whether adjusting for economic announcements such as FOMC meetings, earning seasons or non-farm payroll numbers, or guarding against unexpected macro events, futures and options on futures can play a role in hedging against risk and carefully calibrating market exposure.
Example
A market participant is invested in technology stocks and is looking to reduce exposure to expected announcements that can create price volatility.
By taking a short position in the E-Mini NASDAQ futures market, and offsetting sector-specific exposure, a market participant can protect against short-term downside risk and offset potential declines around specific economic events.
Conclusion
Every investment portfolio is unique, and each trader’s diversification strategy should be carefully balanced to the portfolio’s requirements.
The wide range of liquidity in futures and options on futures contracts provide the flexibility to diversify any trading plan and can be personalized around each trader’s long-term investment goals.
Please note this is not financial advice. Trading in futures and options products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Trading in futures and options could result in a loss in excess of the initial investment. Therefore, carefully consider whether such trading is suitable in light of financial condition.
Risk capital is money that can be lost without jeopardizing one's financial security or lifestyle. Only risk capital should be used for trading, and only those with sufficient risk capital should consider trading in futures and options. Past performance is not necessarily indicative of future results.
MetroTrade LLC does not provide investment or tax advice; any decision you may make to buy, sell or hold a futures or securities position on any trading recommendation is entirely your own and not in any way deemed to be endorsed by or attributed to MetroTrade.