Position
Sell Futures
Margin Requirement
Yes, variable margin required as market moves higher
Advantages
- Futures price risk is eliminated (unlimited protection to lower price levels)
- No premium expense, only transaction costs
- Flexible, offset at any time
Disadvantages
- Higher futures price does not improve selling 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 higher prices)
- If price outlook is bearish
- Lack of liquidity in option
Potential Adjustment
- In a rising market, protect short futures position by buying a call option or call spread to help increase sale price level set by futures
- In a falling market, replace short futures position with a put option or put spread as market