What Is Futures Equivalent?

Futures equivalent is the number of futures contracts required to match the 澳洲幸运5官方开奖结果体彩网:risk profile of an options position on the same 澳洲幸运5官方开奖结果体彩网:underlying asset. In other words, it is the amount of futures needed to offset the net deltas of an options position.

Understanding Futures Equivalent

Futures equivalent only applies to options where the underlying asset is a futures contract, such as options on stock index (澳洲幸运5官方开奖结果体彩网:S&P 500) futures, 澳洲幸运5官方开奖结果体彩网:commodity futures, or currency futures.

Futures equivalent is very useful when you want to hedge exposure to an options position. If a trader determines their futures equivalent, they can then buy or sell the appropriate number of futures contracts in the market in order to hedge their position and become 澳洲幸运5官方开奖结果体彩网:delta neutral. The futures equivalent can be calculated by taking the aggregate delta associated with an options position.

The term futures equivalent is generally used to refer to the equivalent position in futures contracts that is needed to have a risk profile identical to the option. This delta is used in delta-based hedging, 澳洲幸运5官方开奖结果体彩网:margining, and risk analysis systems.

Delta-based margining is an option margining system used by certain exchanges. This system is equivalent to changes in 澳洲幸运5官方开奖结果体彩网:option premiums or future contract prices. Futures contract prices are then used to determine risk factors on which to base margin requirements. A margin requirement is the amount of collateral or funds deposited by custome🐎rs with their brokers.

Exa🎃mple of Futures Equivalents in Opti💛ons Hedging

Most commonly, the futures equivalent is used in the practice of 澳洲幸运5官方开奖结果体彩网:delta hedging. Delta hedging involves reducing or removing the directional risk exposure established by an options position by taking an opposite position in th⛦e underlying seᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚcurity.

If a trader has an options position in gold options that amounts to +30 deltas in terms of futures equivalents, for example, they could sell 30 futures contracts in the market and become delta neutral. Here, if the price of gold increases by 1%, the options position will gain approximately 1%, while the short futures will lose 1%—netting out to zero.

Of course, options are not linear derivatives and their deltas will change as the underlying moves—this is known as the option's gamma. As a result, the futures equivalents will change as the market moves. If the gold market moves up by 1%, for example, while the position may not have made or lost any money, the futures equivalent may have moved from zero for the hedged position to +5. The trader would then need to sell five more futures contracts to return to delta-neutral. This process is called dynamic hedging, or 澳洲幸运5官方开奖结果体彩网:delta-gamma hedging.