Long Futures Position

The long futures position is an unlimited profit, unlimited risk position that can be entered by the futures speculator to profit from a rise in the price of the underlying.

The long futures position is also used when a manufacturer wishes to lock in the price of a raw material that he will require sometime in the future. See long hedge.

Long Futures Position Construction
Buy 1 Futures Contract

To construct a long futures position, the trader must have enough balance in his account to meet the initial margin requirement for each futures contract he wishes to purchase.

Graph showing the expected profit or loss for the long futures position in relation to the market price of the underlying futures.

Unlimited Profit Potential

There is no maximum profit for the long futures position. The futures trader stands to profit as long as the underlying futures price goes up.

The formula for calculating profit is given below:

  • Maximum Profit = Unlimited
  • Profit Achieved When Market Price of Futures > Purchase Price of Futures
  • Profit = (Market Price of Futures - Purchase Price of Futures) x Contract Size

Unlimited Risk

Large losses can occur for the long futures position if the underlying futures price falls dramatically.

The formula for calculating loss is given below:

  • Maximum Loss = Unlimited
  • Loss Occurs When Market Price of Futures < Purchase Price of Futures
  • Loss = (Purchase Price of Futures - Market Price of Futures) x Contract Size + Commissions Paid

Breakeven Point(s)

The underlier price at which break-even is achieved for the long futures position position can be calculated using the following formula.

  • Breakeven Point = Purchase Price of Futures Contract

Example

Suppose June Crude Oil futures is trading at $40 and each futures contract covers 1000 barrels of Crude Oil. A futures trader enters a long futures position by buying 1 contract of June Crude Oil futures at $40 a barrel.

Scenario #1: June Crude Oil futures rises to $50

If June Crude Oil futures instead rallies to $50 on delivery date, then the long futures position will gain $10 per barrel. Since the contract size for Crude Oil futures is 1000 barrels, the trader will achieve a profit of $10 x 1000 = $10000.

Scenario #2: June Crude Oil futures drops to $30

If June Crude Oil futures is trading at $30 on delivery date, then the long futures position will suffer a loss of $10 x 1000 barrel = $10000 in value.

Daily Mark-to-Market & Margin Requirement

The value of a long futures position is marked-to-market daily. Gains are credited and losses are debited from the future trader's account at the end of each trading day.

If the losses result in margin account balance falling below the required maintenance level, a margin call will be issued by the broker to the futures trader to top up his or her account in order for the futures position to remain open.

Synthetic Long Futures

An equivalent position known as a synthetic long futures position can be constructed using only options.

Ready to Start Trading Futures?

Trade futures now at OptionsHouse.com with special low introductory contract rates!

To buy or sell futures, you need a broker that can handle futures trades.

OptionsHouse is a full fledged Futures Commission Merchant that provides a streamlined access to the futures markets at extremely reasonable contract rates.

Click here to open a futures trading account at OptionsHouse.com now!

Continue Reading...

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®.... [Read on...]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin....[Read on...]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.... [Read on...]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks".... [Read on...]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.... [Read on...]

From Around The Web



Follow Us on Facebook to Get Daily Strategies & Tips!



You May Also Like



Futures Basics

Futures Options

Energy Futures

Metal Futures

Grains Futures

Softs Futures

Livestock Futures

Options Strategy Finder

Outlook on Underlying:


Profit Potential:


Loss Potential:


Credit/Debit:


No. Legs:





Home | About Us | Terms of Use | Disclaimer | Privacy Policy | Sitemap

Copyright 2016. TheOptionsGuide.com - All Rights Reserved.