An outright futures position simply refers to an uncovered futures position in the market. It is neither hedged nor a part of any trading strategy.
This is a directional position as it exposes the trader to market fluctuations. It is also known as a naked futures position or naked futures.
Outright futures positions are preferred by speculators as they are simple and easy to execute. Also the risk can be mitigated to some extent by trading in liquid futures contracts as they can easily be covered or squared off. If the outright futures position is hedged or offset with another position it becomes a covered futures position.
Outright Futures Position Example
Let us gain a better understanding of outright futures positions with the help of an example of Reliance Industries Ltd. (RIL).
A long outright futures position is profitable when the price increases. If RIL shares are currently trading at ₹2,500 and RIL futures are trading at ₹2,505, the futures are said to be trading at a premium. This signals a mild positive market sentiment.
A short outright futures position is profitable when the price decreases. If RIL shares are currently trading at ₹2,500 and RIL futures are trading at ₹2,495, the futures are said to be trading at a discount. This signals a negative market sentiment.
Advantages of trading in outright futures position
- Simplicity: Trader’s get a clear understanding of the direction they are trading for and also of the pay-offs, i.e. what the profit and loss will be based on the price movement.
- Magin pledging: Most exchanges and brokers allow pledging of investors' existing holdings in order to take outright futures positions. This reduces the burden of allocating fresh capital.
- Promotes liquidity: Given the ease of trading and pledging benefits, speculators treasure the ability of generating profits with the help of a well-timed trade that takes advantage of an ensuing price move. This promotes liquidity in the market.
Risks associated with trading in outright futures position
- Market risk: If the market moves in the direction opposite to the trader's outlook, he/she will incur a loss on that position.
- Higher potential losses: There is no protection against an adverse move since this position is not off-set against another position. The loss potential is higher as compared to a covered Futures position.
What is a covered futures position?
In order to mitigate the risks of an outright Futures position, traders often enter into covered Futures positions.
A covered Future position refers to a hedged futures position wherein the trader has taken a position in a Futures contract in which they already have a position in the underlying in the cash market or Future market. The Future's position is used to protect against market risk.
A covered Futures position can also be created by buying a put option or selling a call option against the long Futures positions. Conversely, traders also consider owning a call or selling a put to cover a short Futures position.
In case the market moves unfavorably, part of the losses incurred in the Futures position are recovered from the opposite (or hedge) position.
Outright Futures position vs Covered futures position
| Point | Outright Futures position | Covered futures position |
| Existing position in cash market or future market | No | Yes |
| Nature | Speculation | Hedging |
| Usage | Earn speculative profit | Protect the underlying asset from market risk and to earn profits or to reduce the cost of holding the stock |
| Part of a larger or more complex trades or trading strategies | No | Yes |
| Example | Uncovered long position in Futures, uncovered short position in Futures | Hedging the underlying stock using stock Futures, Hedging the entire portfolio with index Futures |