Derivatives are financial instruments whose value depends on the performance of underlying assets, including stocks, fixed income assets, currencies, interest rates, stock indices, and commodities.

What is a Future? A futures contract obligates parties to buy or sell an asset at a predetermined future date and price. This creates a binding commitment for both the buyer and seller.

What is an Option? An option gives the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a specified price within a set time period.

Options Market Operations:

• Call Option Buying: Acquire the right to purchase an asset by paying a premium
• Call Option Selling: Obligation to transfer an asset if the buyer exercises their right
• Put Option Buying: Right to sell an asset at the agreed price until expiration
• Put Option Selling: Obligation to buy an asset if the buyer exercises the option

Put-Call Ratio This metric measures market sentiment by comparing put option volume to call option volume. A high ratio suggests bearish sentiment, while a low ratio indicates bullish sentiment.

Key Differences: Futures vs. Options

Futures:

• Mandatory execution
• Both parties have obligations
• Fixed date and price

Options:

• Optional execution
• Only seller has obligations
• Flexible execution within timeframe

Essential Options Components:

1. Premium: Cost paid for the option
2. Strike Price: Predetermined execution price
3. Expiration Date: Option's validity period

Basic Trading Strategies:

1. Long Call: Buy call options expecting price increases
2. Long Put: Buy put options anticipating price decreases
3. Short Call: Sell call options expecting price stability or decreases
4. Short Put: Sell put options expecting price stability or increases

Advantages:

• Limited loss potential
• Lower capital requirements
• Hedging capabilities

Disadvantages:

• Potential 100% capital loss
• Complex for beginners
• Premium costs can exceed benefits

Other Derivative Products:

1. Certificates: Mirror underlying asset performance
2. CFDs: Exchange price differences between parties
3. Swaps: Exchange of cash flows based on predetermined conditions
4. Warrants: Similar to options but traded between companies outside markets

This market requires thorough understanding and careful risk management. Consider simpler investment alternatives like stocks or ETFs if you're new to investing.

Related Articles

Previous Articles