Trading Derivatives

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Trading Trading DerivativesDerivatives


Trading derivatives instead of the underlying Trading derivatives instead of the underlying equity provides a range of benefits and equity provides a range of benefits and entails a number of cautions.entails a number of cautions.


Derivative contracts can be used to gain Derivative contracts can be used to gain leverage, engage in hedging or risk leverage, engage in hedging or risk reduction, speculate, trade markets where reduction, speculate, trade markets where there is, in fact, no underlying equity, to there is, in fact, no underlying equity, to provide options for purchase or sale in provide options for purchase or sale in uncertain market situations, and to profit uncertain market situations, and to profit from providing a kind of insurance for from providing a kind of insurance for other traders.other traders.

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Options training with Stephen Bigelow will Options training with Stephen Bigelow will provide excellent insight into options provide excellent insight into options trading and trading of other derivatives for trading and trading of other derivatives for the beginner.the beginner.


Traders engage in both fundamental and Traders engage in both fundamental and technical analysis of the underlying in technical analysis of the underlying in order to profit in trading derivatives.order to profit in trading derivatives.


Trading in options contracts, futures Trading in options contracts, futures contracts, forwards, credit derivatives, contracts, forwards, credit derivatives, foreign exchange derivates, and, the foreign exchange derivates, and, the largest market, interest rate derivatives, largest market, interest rate derivatives, can be done to reduce investment risk.can be done to reduce investment risk.


However, the extensive leverage involved in However, the extensive leverage involved in some derivative trading can result in huge some derivative trading can result in huge trading losses leading to such disasters as trading losses leading to such disasters as the $1.3 Billion in trading losses that the $1.3 Billion in trading losses that bankrupted Barings Bank in 1995.bankrupted Barings Bank in 1995.


Derivatives are financial instruments whose Derivatives are financial instruments whose value is based on the value, usually the value is based on the value, usually the anticipated future value, of underlying anticipated future value, of underlying stocks, commodities, futures, or things like stocks, commodities, futures, or things like the weather or energy credits.the weather or energy credits.


Derivatives can be reasonably simple and Derivatives can be reasonably simple and they can be very complicated. they can be very complicated.


Derivative markets are set up to help Derivative markets are set up to help mitigate risk in trading but in doing so they mitigate risk in trading but in doing so they provide the opportunity for the speculator provide the opportunity for the speculator to make money on market fluctuations.to make money on market fluctuations.


Using fundamental analysis of the Using fundamental analysis of the underlying equity as well as technical underlying equity as well as technical analysis of market movement traders can analysis of market movement traders can profit handsomely.profit handsomely.


The largest market for trading derivatives is The largest market for trading derivatives is interest rate derivatives.interest rate derivatives.


An interest rate derivative is the right to An interest rate derivative is the right to receive a given amount of money at a receive a given amount of money at a given interest rate.given interest rate.

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In mid 2009 there were $437 trillion in over In mid 2009 there were $437 trillion in over the counter interest rate contracts and the counter interest rate contracts and $342 trillion in interest rate swaps.$342 trillion in interest rate swaps.


Primarily this market is used by large Primarily this market is used by large companies to control their cash flows.companies to control their cash flows.


Just as the small trader uses technical Just as the small trader uses technical analysis to anticipate market prices large analysis to anticipate market prices large companies use technical analysis companies use technical analysis indicators to anticipate interest rate indicators to anticipate interest rate changes.changes.


Trading derivatives also occurs in the Forex Trading derivatives also occurs in the Forex market.market.


However, derivative trading is not buying However, derivative trading is not buying and selling in a given currency pair but, and selling in a given currency pair but, rather, the use of Foreign exchange rather, the use of Foreign exchange options, Forex swaps, currency futures, options, Forex swaps, currency futures, currency swaps, foreign exchange currency swaps, foreign exchange hedges, and binary options.hedges, and binary options.


The first and primary use of trading The first and primary use of trading derivatives is hedging business risk.derivatives is hedging business risk.


For example, a gold mining operation will For example, a gold mining operation will sell gold futures, promising to deliver a sell gold futures, promising to deliver a given quantity of refined gold a year hence given quantity of refined gold a year hence at an agreed upon price.at an agreed upon price.


In this way the company mitigates the risk of In this way the company mitigates the risk of a market reversal in the price of gold.a market reversal in the price of gold.


Likewise agricultural producers will sell corn Likewise agricultural producers will sell corn futures, soybean futures, engage in live futures, soybean futures, engage in live cattle commodity trading and the like to cattle commodity trading and the like to obtain a guaranteed price on all or part of obtain a guaranteed price on all or part of their anticipated production.their anticipated production.


Buyers of a commodity will, likewise, Buyers of a commodity will, likewise, purchase options futures contracts in order purchase options futures contracts in order to guarantee the cost of a product.to guarantee the cost of a product.


In trading derivatives the trader can use time In trading derivatives the trader can use time honored tools such as Candlestick chart honored tools such as Candlestick chart analysis to identify Candlestick pattern analysis to identify Candlestick pattern formations which will in turn predict formations which will in turn predict changes in derivative prices.changes in derivative prices.

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Trading Derivatives