Basic trading involves a long cash position combined with a short position in the futures contract to maximize revenue while keeping expenses low. It is important to match the futures contract with the cash movement and track futures activity to avoid choosing the wrong investment.
Basic trading is all about playing the extremes of the cash and futures market. As an arbitrage strategy that calls for the implementation of a long cash position that is combined with a short position in the futures contract, the basic trading point is to maximize the revenue generated from the company while keeping expenses to a minimum. Sometimes referred to as a cash and carry trade, this type of arbitrage position has great potential to reap big rewards, if the time is right.
The basic trading process is all about getting the right match between the futures contract and the cash movement associated with the contract. This means looking very closely at the level of activity of stocks that may be a good fit for the strategy. Once a security has been identified as a good candidate, the buying begins. As part of the approach, the deal is made with a long cash position that is matched by a short position in the future. In a sense, what is happening is that the investor is buying cash and taking it to the futures date, where it will be delivered in the contract.
In addition to positioning the buy in this way, it is also possible to position a sell in the same way. Again, basic trading involves the combination of the long cash position and the short futures. The money to fund the long position can be borrowed and repaid, using the investment as collateral. The key is to maintain balance, whether buying or selling, so that financial resources are used in the best way and the chances of profit are greater. The best profits occur when there is a chance to sell just before the futures date arrives. In general, this allows the investor to make a nice profit and take the principle and reinvest it in another trade that is created using the basic approach of the base trade.
Special attention should be paid to the futures position, both when buying and selling. Not understanding the history of futures movement could lead to choosing the wrong investment and derailing the process before it begins. This could also lead to a situation where the funds borrowed to manage the long position could end up not being covered by profits made from the company. Tracking futures activity is essential to successfully using a basic trading technique.
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