Protective future strategies work best in volatile times
Protective Future strategy refers to forming a position in future (either long or short) and minimising the risk by buying ATM or OTM option (Call or Put). It is a limited risk, unlimited profit strategy generally formed where markets are too volatile and sharp moves are expected in the underlying.
How a Protective future Works?
Protective future is commonly deployed when volatility is extremely high in the stock and placing a stop-loss is difficult. For instance, buying TCS December future at 3500 and hedging the position from downside risk, buying an at the money Put (ATM) of 3500 strike. By deploying such a strategy, traders can hold the positions for the month without fearing the downside risk as losses are capped.