02 / Derivative markets
Futures & options,
without the fog.
Derivatives can be useful tools, but their structure and risks deserve respect. Learn the basic concepts before considering participation.
Two different contracts
Understand the obligation.
A future generally creates an obligation to transact later at an agreed price. An option gives the buyer a right, but not an obligation, while the seller takes on an obligation in exchange for a premium.
The moving parts
Knowledge before leverage.
Agreement for later
Futures are standardised contracts with expiry, lot size, margin requirements and daily price settlement.
Rights with a cost
Calls and puts respond to price, time, volatility and strike. The premium is only one part of the picture.
Capital is not the risk
Margin and leverage can make a small price movement create a much larger gain or loss relative to capital posted.
Define the scenario
Know the maximum loss, exit plan, liquidity and expiry behaviour before placing a trade.
Appropriate caution
Speed does not replace understanding.
Some participants use derivatives for hedging or structured exposure; others use them for speculation.
Losses can be rapid and may exceed expectations. Liquidity, gaps and expiry can change outcomes.
Learn contract specifications and practise scenario analysis before using real capital.