What is an Outright Futures Position?
An outright futures position is a long or short trade that is not hedged from market risk. Both the potential gain and the potential risk are greater for outright positions than for positions that are covered or hedged in some way. An outright position is one which stands on its own, and is not part of a larger or more complex trade.
- An outright futures position is a single directional bet position on a futures contract and is not part of a larger or more complex strategy.
- An outright position exposes the trader to greater risk than a hedged position, although the outright position has theoretically greater profit potential.
- If a hedge or offsetting position is added to an outright position, then it is no longer an outright position, but rather a hedged or partially-hedged position.
Understanding the Outright Futures Position
An outright position is one that is a pure long or short bet on the direction of the futures contract. Hedging or offsetting that position with another position means it is no longer an outright position.
Outright futures are also called naked futures because they leave the investor exposed to market fluctuations. To reduce risk, the investor may choose to purchase a protective offsetting option, an offsetting position in the futures' underlying security, or an opposite position in a related market. Hedging or offsetting the risk means it is no longer an outright futures position.
An outright futures position is inherently risky because there is no protection against an adverse move. Most traders do not consider trading liquid futures contracts to be excessively risky, especially because in most cases it is easy to cover or to sell the position back to the market. Most speculative positions in the futures market are outright positions.
However, a declining market for an investor holding a long position in a futures contract still has the potential to deliver significant losses. In this case, holding a put option against the long futures position could cap losses to a manageable amount. The trader's profit potential would be reduced by the premium, or cost, of the option. Consider it to be an insurance policy the trader hopes not to use.
Traders selling futures short without a hedge face even greater risk since the upside potential for most futures markets is theoretically unlimited. In this case, owning a call on the underlying futures contract would limit that risk.
Another alternative to an outright futures position that can sometimes carry less risk is to take a position in a vertical spread trade. This caps both profit potential and risk for loss, and would be a good choice for a trader that only expects a limited move in the underlying security or commodity.
While all the above limit risk, they also tend to limit or reduce profit. Many speculative traders prefer outright futures positions because of their simplicity (one position) and the ability to generate larger profits when a trade is well-timed and takes advantage of an ensuing price move.
Example of an Outright S&P 500 E-Mini Futures Position
Assume a trader believes that the S&P 500 is going to rise over the next several months. It is currently January, so the trader buys a June contract of the E-Mini S&P 500 listed on the Chicago Mercantile Exchange (CME) under the symbol ES.
The trader uses a limit order to enter a position at $2,885, buying one contract. This particular futures contract moves in 0.25 increments, with four increments—called ticks—to each point. Each tick is worth $12.50 in profit or loss, and each point is worth $50 (4 x $12.50).
This position is a pure directional bet on the price of the futures contract rising. The trader is not taking any other positions to offset or magnify the risk or profits associated with the position. Therefore, this is an outright futures position.
Assume that in one month the price of the contract is at $2,895. The trader is up 10 points or $500 ($50 x 10 points), less commissions.
Assume the price drops to $2,880. The trader is down five points, or $250 ($50 x 5 points).