Derivatives trading for retail investors

[ ADVANCED TRANSACTIONS FOR INVESTORS]

Derivatives are contracts to enter into a future transaction with a specific asset (“underlying asset”) under predetermined conditions. The cost of a derivative and the amount of obligations of the parties to the contract depend on changes in the value of the underlying asset of the contract (which may be securities, currencies, commodity indices, etc.). The most common derivatives are futures and options. They are officially traded on exchanges.

[ WHAT ARE OPTIONS ]

This is an agreement entered into on the stock exchange under which an investor, for a certain amount of money, acquires the right to buy or sell an underlying asset in the future. That is, it is not necessary to buy or sell, but it is possible.

Imagine that you want to buy Google shares in three months. You find a seller to whom you say, “I want the right to buy Google shares at $140 in three months.” The seller agrees, but for this right he asks for a small premium - for example, $5

Possible future scenarios:

1. After three months, the share price rises to $160. You may exercise the right to buy an asset at an agreed price. In this case, your profit is: $160 - $140 - $5 = $15.

2. If the shares, on the contrary, become cheaper, you have the right not to buy the asset. After all, an option is a right, not an obligation. In this case, your loss will be $5, which you paid as a premium