One of the most important characteristics of any investment portfolio is its diversity. Portfolio diversification helps offset exposure in any single position, and helps investors protect themselves against wide swings in key sectors.
Typically, traders diversify by trading both equities and bonds. But in times of market volatility, a portfolio can greatly benefit by the addition of futures and options on futures contracts.
Futures and options on futures give market participants the opportunity to hedge against market risk by sector and to raise and lower levels of desired exposure in times of anticipated and unanticipated event-driven volatility.
Whether adjusting for economic announcements such as FOMC meetings, earning seasons or non-farm payroll numbers, or guarding against unexpected macro events, futures and options on futures can play a valuable role in hedging against risk and carefully calibrating market exposure.
Example
A market participant is invested in technology stocks and is looking to reduce exposure to expected announcements that can create price volatility.
By taking a short position in the E-Mini NASDAQ futures market, and offsetting sector-specific exposure, a market participant can protect against short-term downside risk and offset potential declines around specific economic events.
Conclusion
Every investment portfolio is unique, and each trader’s diversification strategy should be carefully balanced to the portfolio’s requirements.
The wide range of liquidity in futures and options on futures contracts provide the flexibility to diversify any trading plan and can be personalized around each trader’s long-term investment goals.
