- Protective Puts: Investors holding a portfolio of stocks can use index futures to hedge against market downturns. Simultaneously, they can purchase protective put options on the index, providing insurance against potential losses in the underlying portfolio.
- Dynamix Asset Allocation: Employing index futures enable dynamic asset allocation. Investors can adjust their exposure to equities by taking long or short positions in index futures, helping them adapt to changing market condition and mitigate risks in their portfolios.
- Portfolio Insurance: Index futures serve as a form of portfolio insurance by allowing investors to establish short positions to offset potential losses in their stock portfolio during adverse market movements. This strategy helps safeguard the overall value of the investment portfolio.
- Hedging Sector-Specific Risks: Sector index futures are valuable for hedging risks associated with specific industries. Investors with concentrated exposure to a particular sector can use futures contracts on that sector’s index to protect against downturns in that specific market segment.
- Tail Risk Hedging: Index futures can be employed for tail risk hedging, addressing extreme and unexpected market events. Traders can use these contracts to protect against “black swan” events that may lead to significant market downturns, ensuring a level of financial protection.
Index Futures: How it Works, Types, Examples & Advantages