Futures trading is a widely recognised and lucrative investment strategy in the financial markets. It entails trading contracts to buy or sell an underlying asset at an agreed-upon price and date. In Singapore, the Singapore Exchange (SGX) is one of the leading futures exchanges, offering a wide range of products such as equity index futures, commodities, and currency futures.
To be a successful futures trader in SGX, one must understand the market dynamics and use advanced trading strategies. These strategies help traders to mitigate risks and potentially maximise returns. This article will discuss advanced futures trading strategies for SGX in Singapore. Each strategy aims to provide insights into different approaches that can be used to trade futures contracts on SGX.
Spread trading
Spread trading is a popular advanced futures trading strategy used by traders in SGX. It involves simultaneously buying and selling two different but related contracts to take advantage of price discrepancies between them. This strategy requires careful analysis and timing, as the goal is to take advantageof the difference in price movements between the two contracts.
One common type of spread trading is called intermarket spread, where traders take positions in related contracts from different markets. For instance, a trader can buy a contract on SGX and sell the same one on another exchange, such as the Chicago Mercantile Exchange (CME). This strategy is used when there are differences in price or trends between two exchanges.
Another type of spread trading is called intra-market spread, where traders take positions in related contracts within the same market. For example, a trader can buy a contract on SGX and sell another one with a different expiration date or underlying asset. This strategy works best when there are price discrepancies between the two contracts.
Spread trading allows traders to diversify their portfolios and reduce risk by hedging against potential losses in one contract with profits from another. It also requires less initial capital than other trading strategies, making it attractive for new traders in SGX. However, identifying lucrative spread opportunities requires high expertise and market knowledge.
Calendar spreads
Calendar spreads are a type of intra-market spread where traders take positions in contracts with different expiration dates. This strategy is based on the principle that the price of a futures contract will converge with its spot price as it approaches expiration. Traders take positions in two contracts with different expiration dates, buying the contract with a later expiration date and selling the one with an earlier expiration date.
Calendar spreads are used when traders believe that the price of a futures contract will increase over time. By taking a long position in the later contract, traders can take advantageof the price difference when it converges with the earlier one. This strategy is beneficial for commodities that have seasonal price fluctuations.
However, calendar spreads also come with risks. If the market moves against the trader’s prediction, they may experience losses on both contracts. Traders must carefully monitor market conditions and exit positions before expiration to avoid potential losses.
Straddle and strangle
Straddle and strangle are two advanced futures trading strategies that involve taking positions in both a call option (to buy) and a put option (to sell) on the same underlying asset with the same expiration date. The difference is that a straddle has the same strike price for both options, while a strangle has different strike prices.
Traders use these strategies when they expect significant price movements in the underlying asset but are uncertain about its direction. With positions in both a call and put option, traders can take advantageof whichever way the market moves.
However, these strategies come with high costs as traders need to buy two options. They also have limited profit potential and require precise timing as the market must move significantly in one direction for potential returns to be realised.
Arbitrage
Arbitrage is a trading strategy that takes advantage of price discrepancies between related futures contracts. Traders buy contracts on one exchange where prices are lower and sell them on another where prices are higher, making a potential return from the price difference. This strategy requires quick execution and is mainly used by professional traders with access to real-time market data.
Arbitrage can also occur between contract months within the same market or with different delivery dates for the underlying asset. As it involves no risk, arbitrage is considered a low-risk trading strategy. However, the potential returns are also limited due to transaction costs and market inefficiencies.
For example, a trader can buy an SGX contract on a commodity with a lower price and simultaneously sell the same contract on CME for a higher price. This strategy is beneficial when there are differences in market conditions, such as supply and demand, between the two exchanges.
