InvestorQ : Is it true that we have to trade very carefully when trading in futures?
Tanya Mehta made post

Is it true that we have to trade very carefully when trading in futures?

Answer
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Ayushi Kampani answered.
2 years ago


That is partially correct, but it is nothing so complex that you can comprehend it. Imagine you have bought futures of Infosys expecting a bumper quarterly result. The profits were on course but the guidance turns out to be an absolute disaster (Oh yes, don’t we remember April 2003?). Most likely you are up against a huge MTM loss and a possible wipe out of your capital. That is where intelligent futures trading and the power of discipline come in handy. You need to manage and calibrate your risk quite well.

When you trade futures you have some apparent advantages. Firstly you are trading on margin. Effectively, you are carrying a leveraged position without the concomitant worries that borrowing entails. That means you have the potential to increase your ROI. Futures can also be used to create synthetic positions to reduce your risk of equity holdings. But the risks are humungous too! Don’t buy just one side of the argument. Just as profits get magnified in futures, losses also get magnified. It works both ways.

Being a leveraged position, futures can be dangerous in a volatile market. It is highly vulnerable to macro and overnight risks. Liquidity, being largely institutional in futures, can become unidirectional quite fast. That is dangerous if you are in an opposite position. There is also the spread you need to be careful about and not pay too high a premium on futures in robust markets.