Outright Futures Position

What Is an Outright Futures Position?

An outright futures position is an unhedged futures trade that is taken all alone and isn't part of a larger or more complex trade.

Understanding Outright Futures Positions

An outright futures position is a long or short trade that isn't 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 manner. An outright position is one that stands all alone and isn't part of a larger or more complex trade. A profit is made from a long outright futures position in the event that the price rises following the purchase, or from a short trade assuming that the price falls after the short is initiated.

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 presently not an outright position.

Outright futures are additionally called naked futures because they leave the investor exposed to market vacillations. To reduce risk, the investor might 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 presently not an outright futures position.

An outright futures position is inherently risky because there is no protection against an adverse move. Most traders don't consider trading liquid futures contracts to be excessively risky, especially because much of the time 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 actually can possibly deliver huge 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, claiming 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 it would be a decent choice for a trader that just expects a limited move in the underlying security or commodity.

While all the above limit risk, they likewise tend to limit or reduce profit. Numerous 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.

Outright Futures Position Example

Assume a trader believes that the S&P 500 will rise over the next several months. It is currently July, so the trader purchases a December 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 $4321, 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 isn't taking some other positions to offset the risk or amplify the profits associated with the position. Therefore, this is an outright futures position.

Assume that in one month the price of the contract is at $4351. The trader is up 30 points or $1500 ($50 x 30 points), less commissions. Subsequently, the price drops to $4311. The trader is down ten points, or $500 ($50 x 10 points).

Features

• In the event that a hedge or offsetting position is added to an outright position, it is as of now not an outright position, yet rather a hedged or partially-hedged position.
• An outright position exposes the trader to greater risk than a hedged position, albeit the outright position has theoretically greater profit potential.
• An outright futures position is a single directional bet position on a futures contract and isn't part of a larger or more complex strategy.