Derivatives are popular hedging and speculative instruments that offer a wide range of opportunities, allowing investors to set their own risk tolerance.
Basic strategies
Market participants can pursue the following basic strategies:
- Hedgers
use options and futures to hedge a portfolio of stocks against potential price losses. Price losses are limited by the selling price set in advance. - Traders
seek to generate high profits using options and futures, though with very high risk. The acquisition of the underlying asset is less important, only rapid changes in value matter. Profits can be made whether prices are rising or falling - given the market assessment is correct. - Arbitrageurs
take advantage of price differences between equivalent positions in the spot and futures markets to generate risk-free profits.
Basic positions
The following section outlines the basic positions for futures and options. The profit/loss chart shows the potential profits and losses from the position at expiration, depending on the various values the underlying asset may take.
There are two basic positions for futures:
