Options & Derivatives Trading

Reviewed by Vishnu | Updated on Aug 27, 2020

What is Options & Derivatives Trading?

An option is defined as a contract that gives investors the opportunity to purchase/sell an underlying asset such as an exchange-traded fund (ETF) or security at a pre-established price during a certain period. Options trading takes place in the stock, bond and ETF market.

  1. On the other hand, a derivative is defined as a contract signed between 2 or more traders or parties on the basis of an underlying financial instrument.

  2. Derivatives allow traders to determine the price of the underlying instrument in the future without actually having to buy the instrument/asset/security.

Derivative trading allows traders to speculate the future price of various assets such as stocks, commodities, currencies, interest rates and bonds.

What are the advantages of Options & Derivatives Trading ?

Advantages of Options Trading

  1. Generates significant profits without having to splurge large sums of money.
  2. Options are less prone to be impacted by market fluctuations.
  3. Options trading allows you to capitalise on the underlying assets performance over time which actually having to invest in the same.

Advantages of Derivative Trading

  1. Derivatives serve as a hedge for traders who are looking to offset losses by the underlying asset.
  2. Improves market efficiency.
  3. Helps in determining the future price of an underlying instrument.

Who should consider it?

Options trading is more suitable for investors who are looking to gain significant profits with limited risks off an underlying asset without actually having to invest in it.

Derivatives trading, on the other hand, serves as a hedge to determine the future price of an underlying instrument while mitigating the impact of market movements, interest rate fluctuations, and currency movements among others on the holdings.

Hence, derivatives could be a more suitable choice for investors and traders who looking to protect themselves from unforeseen market fluctuations.

Options and derivatives are generally less risky when compared to stocks. This is because of the relatively less financial commitment options and derivatives trading requires.

Conclusion

Options and derivatives trading can prove to be a great opportunity for investors and traders once the basic concepts are understood. However, it can also have a negative impact if invested without proper research.