Options & Derivatives Trading

Options are derivatives that are often used by traders and investment professionals to manage or reduce their risk. Understanding options and other derivatives can enhance a trader's profitability.
Frequently Asked Questions
  • Is options trading a derivative?

    Yes, the simplest derivative investment allows individuals to buy or sell what is known as an option on a security. An option is a contract to buy or sell a specific financial product. Various derivative instruments besides options include swaps, futures, and forward contracts. The investor does not own the underlying asset, but they hope to profit by making bets on the direction of price movements spelled out in the contract.

  • What are derivative ETF futures and options?

    Simply put, ETF futures and options are derivative instruments tied to exchange traded funds. Futures represent an agreement to buy or sell shares of an underlying ETF at an agreed-upon price on or before a certain date in the future. Options, in contrast, give the holder the right, but not the obligation, to trade the underlying ETF shares at an agreed-upon price on or before a specified date in the future.

  • How big is the derivatives market?

    The actual size of the derivatives market depends on what a person considers part of the market and so estimates vary widely. The entire derivatives market is, simply put, huge, and top estimates can be more than $1 quadrillion on the high end, based on what is included as a derivative. The larger estimates come from adding up the notional value of all available derivatives contracts. For example, the overall derivatives markets include products including options, warrants, swaps, credit default swaps, futures contracts, and forward contracts, as just a handful of examples. Some analysts argue that such a calculation doesn't reflect reality, in that the notional value of a derivative contract's underlying assets does not represent the actual market value.

  • What is a forward contract?

    A forward contract is a derivatives instrument that is one of the oldest and most common types of derivative securities, in which counterparties agree to buy (receive) or sell (deliver) an asset at a specified price on a future date. They are used as a form of risk management, in that a forward contract can be used for hedging or speculation. They are quite common in foreign exchange markets as a way for investors to take advantage of arbitrage opportunities from various global currency markets.

  • What are ETF futures?

    ETF futures are a kind of financial derivatives product built on existing exchange traded funds. A futures contract is an agreement to buy or sell shares of an underlying ETF at an agreed-upon price on or before a specified date.

Key Terms

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