Position
Buy Futures
Margin Requirement
Yes, variable margin required as market moves lower
Advantages
- Futures price risk is eliminated (unlimited protection to higher price levels)
- No premium expense, only transaction costs
- Flexible, offset at any time
Disadvantages
- Lower futures price does not improve buying price
- Capital expense of potential margin exposure
When to Apply
- If futures price level fits into budget or operating margin (no flexibility is needed to participate in lower prices)
- If price outlook is bullish
- Lack of liquidity in option market to execute a flexible price strategy
Potential Adjustment
- In a rising market, replace long futures position with a long call option or call spread as market sentiment becomes less bullish
- In a falling market, protect long futures position by buying a put option or put spread to help reduce purchase price level set by futures