Definition
An outright futures position refers to a straightforward or simple long or short position in a particular futures contract. A long position indicates the buyer’s intention to purchase the asset in the future, banking on price increase. Conversely, a short position illustrates the seller’s intention to sell in the future, anticipating a price decrease.
Phonetic
owt-riyt fyoo-chuh-rz puh-zish-uhn
Key Takeaways
<ol><li>Outright Futures Position refers to an investment strategy where an investor takes a direct position in the futures market, either buying or selling contracts with the anticipation of profiting from price changes.</li><li>As outright futures positions involve direct trading in the futures market, it can entail a significant amount of risk due to the volatility of the market. Therefore, it requires a deep understanding of the market and its potential price movements.</li><li>Despite the risk, outright futures positions also provide the potential for substantial returns. This is because the profit potential is virtually limitless as it is based on the occurrence of favorable price movements in the futures market.</li></ol>
Importance
An Outright Futures Position refers to ownership or obligation that an investor holds to buy or sell a financial instrument or commodity at a predetermined future date and price. This concept is incredibly important in the finance/business realm because it allows investors and companies to hedge against potential price risks or speculate on the price movement of an underlying asset. This strategic utilization enables them to secure prices, manage costs, and indirectly influence the supply-demand dynamics of the futures market. Thus, an Outright Futures Position is instrumental in safeguarding interests, mitigating risks and potentially capitalizing on predicted market trends.
Explanation
An Outright Futures Position refers to a standalone position that an investor holds in a futures contract. It assists the investors in either hedging risk or making a profit from price changes. When an investor gets into a buying or selling agreement for a particular asset to be delivered at a future date, they employ an outright futures position. The main purpose of this strategy is to either safeguard against potential losses that may come from adverse price movements in the future or to capitalize on a predicted price movement by committing to a price now for a transaction that will occur later.In terms of hedging, outright futures positions can be beneficial to producers and consumers alike. For example, imagine a farmer who is concerned about a potential fall in grain prices by the time he harvests. He could take a short position in a grain futures contract to lock in a price now and mitigate potential losses. Conversely, a bakery expecting prices to rise could take a long position to secure today’s prices. Here, the primary goal is price risk management rather than immediate profit. Financial investors also use outright futures positions for speculative purposes, which allows them to profit from correctly predicting future price movements.
Examples
1. Commodity Trading: In the real world of business and finance, one common example could be a situation where a farmer decides to sell his next crop ahead of time due to concerns over potential price decrease in the future. He might lock the price by selling wheat futures. This is an outright futures position as the farmer has a direct interest in the underlying commodity i.e., wheat.2. Stock Market Trading: Another example could be a trader who anticipates a rising stock market decides to take a long position in S&P 500 futures. The trader buys a futures contract agreeing to purchase the equity index at a set price at a future date. This is an outright futures position because the trader is betting on future value of a single index.3. Foreign Exchange Trading: A third example could be a manufacturing company in the U.S. that has been contracted by a German firm to deliver goods in 6 months. The U.S. company, assuming the EUR/USD exchange rate might go down in future, decides to take an outright futures position by buying Euro futures. This allows them to lock in the current exchange rate, ensuring that they will receive the amount of euros agreed upon, regardless of future currency fluctuations.
Frequently Asked Questions(FAQ)
What is an Outright Futures Position?
An Outright Futures Position is a trade in which the investor has made a purchase or sale of a futures contract in a way that exposes the investor to the risks and returns of owning that contract. This is in contrast to a spread position, where the investor buys one futures contract and sells another to offset the risk.
How does an Outright Futures Position work?
In an outright futures position, an investor will purchase a futures contract at a specific price and aim to sell it at a higher price in the future, or vice versa. This creates exposure to the change in the price of the asset underlying the futures contract.
When should an investor use an Outright Futures Position?
An Outright Futures Position is used when the investor has a strong conviction about the future direction of the price of the underlying asset. It should be taken if they are willing to bear the risk of market price fluctuations.
How is an Outright Futures Position different from a futures spread position?
While both positions involve buying and selling futures contracts, an Outright Futures Position involves a single purchase or sale and therefore has a higher risk associated with it. A futures spread position, on the other hand, involves buying one futures contract and selling another, thereby offsetting some of the risk.
What are the major risks associated with an Outright Futures Position?
The major risks with an outright futures position come from the unpredictability of the market. Prices of the underlying asset can fluctify widely causing the investor to incur potential losses if the market moves against the positions they have taken.
Can anyone trade an Outright Futures Position?
While technically anyone can trade outright futures positions, it’s important that the investor has the required knowledge and understanding of the futures market as it involves a high level of risk. Hence, it is typically more suitable for experienced traders.
How can an investor manage the risk associated with an Outright Futures Position?
One of the primary ways investors manage the risk associated with outright futures positions is by setting stop loss levels. This means predetermining a price level at which they will exit the position to cap potential losses. Diversifying the investment portfolio can also be a good way to manage the risk.
Related Finance Terms
- Derivatives
- Forward Contracts
- Contract Expiry
- Market Liquidity
- Spot Price
Sources for More Information
