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Managing Portfolio Risk
Another unique quality of using options on futures to manage portfolio risk is to hedge specific positions against certain risks in various ways.
Because of the varied asset classes that futures contracts represent, investors can selectively hedge most, if not all, asset classes in their portfolios. From an investor who wants to hedge with the S&P 500 contract to one who wants to reduce or hedge foreign currency exposure with options on currency futures. An investor can hedge the fixed income portion of their portfolio with bond options on futures.
An added benefit of hedging with options on futures is that they allow positions in futures contracts to be hedged in the same ratio. If you own one E-mini S&P 500 futures (ES) contract, then you could potentially offset risk using one ES option contract.
For many traders, finding ways to manage risk in a trading portfolio is a priority. As you can see, options on futures provide many ways to manage risk and optimize a diversified portfolio. Whether you are looking to reduce your cost base in trades, hedge to manage portfolio risk or complement trades in equity markets, there are advantages for the options on futures trader. Take a look and see if diversification with options on futures is appropriate in your circumstance to diversify risk in your portfolio.