Can you provide a guide on how to trade in derivative contracts i.e., futures, options, and swaps in step-by-step method? What should investors be looking at and how to analyse such contracts?
Anusha KulkarniWe have been covering about derivatives, including the basic concepts, under ‘Mastering Derivatives’. Do follow the column published every Sunday in ‘Do the Derivatives’ page in Portfolio edition. We will also be providing trading strategies and useful derivatives data on the same page every week. You can also find all the relevant articles on our website.
That said, to trade in derivatives, it is very important to understand how futures and options work. As the name ‘Derivatives’ indicate, the price of futures and options are derived from an underlying asset, which can be stocks, commodities, currencies etc. Swaps are generally traded by financial institutions and companies. They are not for retail traders.
Futures contract gives you linear payoffs whereas options contract’s payoff is non-linear. For e.g., the futures contract may move by 10 units if the underlying asset moves 10 units; but change in options can be less than 10 units depending on the strike price and its proximity to the underlying asset price.
Technical analysis can help you in spotting the trends. There are many methods such as breakouts, patterns, reversals etc. It should be chosen based on your risk appetite, risk taking ability, emotional balance etc. Based on the same, you should also understand whether intraday trading or swing trading suits you better.
Send your queries to firstname.lastname@example.org