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Equity Derivatives

Derivatives trading today no doubt contributes to a major portion of trading volumes in today’s financial markets around the world and equally so in Indian markets. The options trading which is the most popular dominates the overall volumes. It is therefore imperative that the client understands this segment well, not only for trading but also for risk mitigation through hedging as well. Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These financial instruments help you gain by betting on the future value of the underlying asset. So, their value is derived from that of the underlying asset. Hence, they are known as ‘Derivatives’.

Derivatives do away with the need to invest a large amount of capital upfront and allowing one to benefit from market movements. This gives the investor greater liquidity than most other assets. Derivatives provide avenue to help leverage on anticipated market movements and act as effective tools to speculate and hedge one’s risks to earn returns in a relatively shorter duration. One can trade in Futures - contracts as an agreement between two parties to either buy or sell a fixed quantity of assets at a particular time in the future for a fixed price . Alternatively , one can also trade on Options – a similar contract, except the parties are not obligated to fulfill the terms of the agreement. These contracts are then traded in the market.

Leverage :

Investor can enjoy higher trading exposure with a low margin amount

Hedging :

Investor can safeguard himself/herself against potential losses, by hedging his/her positions. As a part of startegy, one may buy in the cash segment and agree to sell in the derivatives market or vice versa.

Risk Return Variable :

Offers varied risk return parameters to choose between conservative or high risk based on the expected rise and fall of stock prices during a given period of time.

Higher Probability of Returns :

Probability to garner higher returns irrespective of market moving up, down or sideways depending on the position taken by the investor.

However, a word of caution from experience, that, the derivative product is only for the high risk taking investor and unsuitable for novice and risk averse investor. The pre-requisite to enter the derivative market would be high risk taking ability vis-à-vis available resources on hand.

Risk Disclosures on Derivatives