All about Derivatives

What are Derivatives?

Derivatives are financial products which obtain or derive their value from specific underlying assets, whose value keep changing based on market conditions. For example; petrol is a derivative of crude oil.

How does derivative trading work?

Traders trade derivative by predicting future price movements of underlying assets. Derivatives contracts are also used for hedging and arbitrage purposes.

Popular derivatives products in the Indian stock market

• Future contracts

  Futures contracts are standardized contracts between buyers and sellers to buy/sell an underlying asset at a predetermined price, size and date in future. These contracts are traded on stock exchanges.

• Option contracts

  Options contracts give buyers the right, but not the obligation to buy or sell an underlying asset at a predetermined price and future date. There are two types of options; call option and put option. A call option gives the right to buy and a put option gives the right to sell to the buyer of an option.

Derivatives are available in selected indices and stocks in India on the stock exchanges.

Derivative market participants

• Hedgers

• Speculators

• Arbitrageurs

Reasons to trade in derivatives

• Protects you against market volatility.

• Allows you to use the leverage by paying a small amount as margin or premium.

• Enables you to take positions in different scenarios including bullish, bearish, volatile, rangebound, etc.

How to trade in derivatives?

Traders should have an active trading account that permits derivative trading. With ICICIdirect traders can place their derivative trading orders online through their trading account.