Futures Plays for Regular Investors - Banking on Takeovers and Hedging Your Real Estate

 


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Normally, routine investors don't get involved with futures since they're perceived to be more complex, risky and difficult to get involved in than conventional stocks, bonds and mutual funds. Plus, these days, ETFs, Options and other instruments allow for similar strategies, right? Well, there are some futures offered by particular companies that can't be accessed anywhere on your run of the mill E*Trade or Ameritrade account. I did a post a few months ago on a futures site where you could take positions in whether or not bird flu hits the U. S. or we conduct a strike against Iran. In that article, I cited a hedge strategy where you go long with a Biotech company working on the bird flu vaccine while shorting the futures contract for the event occurring. Today, I came across a new site with other interesting opportunities.

HedgeStreet Exchange (http://www.hedgestreet.com/) offers two types of futures that I find to be particularly interesting. First, they offer futures on whether or not particular companies will merge or be bought out (especially following my AQNT/MSFT debacle, this is especially timely). Right now, they have positions for: XM/Sirius, Yahoo/Microsoft, Newscorp/Dow Jones, Hersheys/Cadbury, ISE/NYSE, and Nasdaq/PHLX. In addition to these offerings, it also has futures based on local real estate market valuations. This provides for a great investment strategy for homeowners.

Potential Futures Strategies for Takeovers:
The way it works is that you can either buy or sell the contract and the winners of the contracts get the full hundred dollars and the losers lose a hundred. A low likelihood event would only go for a few hundred dollars. Where it gets interesting is if you buy some out of the money options on Yahoo, thinking they'll be bought out by Microsoft, you'd stand to make a return of say, 1000% in the event of a buyout. But this is unlikely, especially given Microsoft's recent comments. How do you hedge against the loss of your options you just purchased? If you sell a few futures contracts betting against the takeover, you will reap those $100 contracts in the event of no buyout. You'd just need to make sure the expiry timing of the futures and the options match up and the likely buyout price puts you well into the money for the options. This could be an extremely lucrative strategy with a net neutral outcome for non-events and a windfall for takeovers. I will research the individual listings a bit more, sign up and report back on my positions.

Futures Strategy for Homeowners:
Although not all real estate markets are listed, a lot of the majors are including New York, Boston and California. If you're a homeowner in any of these regions sitting on substantial capital gains OR if you're considering moving any time soon OR if you're sick of seeing home prices decline in my area and want to reap some rewards in a futures environment as your equity continues to decline, you can buy or sell futures for your locale to hedge. Here's an example: If I live in the New York area, I can sell futures contracts against a substantial rise in median home prices in my area so I can reap some rewards either way. In the event home prices only rise modestly or they decline, I can attain additional income from the futures revenues since they expired without exceeding the threshold. If my local market takes off, my home is worth a lot more and I have to pay for the futures contracts that went the wrong way. Due to the substantial leverage a home brings, you might lose a thousand bucks on the futures, but see a $40,000 home price increase in a given year.

Here's the New York Example from the site:

This contract allows traders to take a position on whether the median house price for the New York metropolitan area, as reported by the National Association of Realtors, will be greater than $470,000 on November 21, 2007.

Aside from these exciting prospects, there are the usual non-farm payrolls futures and the like. Since this isn't my area of expertise, I'll leave you with the aforementioned hedging strategies. Feel free to comment on specific contracts/strike prices you're considering.

Everydayfinance Blog: http://www.everydayfinance.blogspot.com

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