Identify and evaluate various futures and options alternatives to achieve your investment aims. Investor strategies commonly include commodity cash and carry trades, portfolio hedging, and targeting specific risk exposures.
Investor hedging requirements are numerous as there are investors and market conditions. These might include generating a yield with a cash and carry trade, isolating a specific aspect of risk, or a view an investor is looking to express. We can help investors identify and evaluate various futures and options alternatives to achieve these aims. If you’d like to explore cash and carry alternatives in the current market, or discuss how to hedge risks specific to your portfolio let’s talk.
Cash and carry as a yield alternative:
- Cash and carry is a popular pair trade involving buying a physical commodity and also selling futures on the same commodity.
- It is an arbitrage strategy where the investor aims to capture the positive slope, or contango, in a futures term structure.
- When effective, it generates a yield for the investor as the price of the futures sold converges with the spot price of the physical commodity as the futures contract maturity nears prompt.
- Cash and carry trades aim to help eliminate exposure to the price of the commodity, and generate a yield.
- For some investors, there may be tax advantages to a cash and carry yield compared to earning interest.
Other investor hedging scenarios:
- An investor owns shares in several mining companies which she believes are particularly good operators. She wants exposure to these miners, and the commodities they produce, but believes copper is currently overpriced. The investor consequently uses a short copper futures position to hedge that one component of an investment she otherwise likes.
- An investor owns a portfolio of new home construction companies. The investor believes that the sales at these companies will remain strong unless interest rates rise by more than a specific amount. If rates do rise beyond that point, the investor expects fewer homes will be sold and the companies’ value will suffer. The investor buys options on interest rate futures to hedge this potential outcome.
Disclaimer: This material is conveyed as a solicitation for entering into a derivatives transaction. This material has been prepared by a Kilo Futures broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Kilo Futures does not maintain a research department as defined in CFTC Rule 1.71. Kilo Futures, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.