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Derivative Contracts

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Derivative Contracts

Derivative contracts are agreements by which a trader gains leverage on investments in underlying financial instruments such as stock shares. Derivative contracts derive their value from the underlying instrument. However, they offer the opportunity for greater profit, the option to buy stock or sell stock at a given price, the possibility of hedging risk, and the possibility of trading where there is no underlying financial instrument. Derivatives contracts include those used in trading options, futures, commodities, foreign exchange trading, interest rates, or credits.


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  • 1. Derivative ContractsBywww.CandlestickForums.com
  • 2. Derivative contracts are agreements bywhich a trader gains leverage oninvestments in underlying financialinstruments such as stock shares.www.CandlestickForums.com
  • 3. Derivative contracts derive their valuefrom the underlying instrument.www.CandlestickForums.com
  • 4. However, they offer the opportunity forgreater profit, the option to buy stock orsell stock at a given price, the possibilitywww.CandlestickForums.com
  • 5. of hedging risk, and the possibility oftrading where there is no underlyingfinancial instrument.www.CandlestickForums.com
  • 6. Derivatives contracts include those usedin trading options, futures, commodities,foreign exchange trading, interest rates,or credits.www.CandlestickForums.com
  • 7. Derivative contracts can be complex(exotic) or they can be simple (vanilla).www.CandlestickForums.com
  • 8. The underlying features that all have incommon is the ability to gain more profitand to have more choices at a futuredate.www.CandlestickForums.com
  • 9. The risk with these contracts varies.www.CandlestickForums.com
  • 10. For example, buying calls in optionstrading gives the buyer the option to buy100 shares of stock per contract on orbefore a given date, the contractexpiration date.www.CandlestickForums.com
  • 11. Traders will pay a premium for thisopportunity and will exercise optionscontracts, the derivatives, if the stockprice goes up enough to make a profit.www.CandlestickForums.com
  • 12. On the other hand selling calls gains thetrader a premium but gives away theopportunity for substantial profits if thestock price goes up dramatically.www.CandlestickForums.com
  • 13. The risk involved in derivative contractsvaries.www.CandlestickForums.com
  • 14. In fact, many trade derivatives as part ofa hedging strategy while others engagein options trading and futures tradingwith potentially unlimited risk.www.CandlestickForums.com
  • 15. An example of trading derivatives toreduce investment or business risk is awww.CandlestickForums.com
  • 16. gold mining company selling futures ongold at a price below the current marketvalue.www.CandlestickForums.com
  • 17. The company guarantees themselves aprofit on part of their expectedproduction.www.CandlestickForums.com
  • 18. This trading strategy can be used byinvestors in the company as well.www.CandlestickForums.com
  • 19. Those engaged in long term investingcan also take advantage of derivativecontracts.www.CandlestickForums.com
  • 20. A common tactic is the use of coveredcall options.www.CandlestickForums.com
  • 21. An investor who is familiar with thesupport and resistance zones of one ofhis cyclical stocks can profit by sellingcovered calls when the stock is at thetop of its traditional trading range.www.CandlestickForums.com
  • 22. The investor gains the premium,offsetting his portfolio loss, while thestock cycles down in price.www.CandlestickForums.com
  • 23. Another covered option is buying putson a stock that has recently run up inprice.www.CandlestickForums.com
  • 24. The stock owner pays a little insurancein the form of the premium.www.CandlestickForums.com
  • 25. If the stock corrects substantially he orshe will then exercise the put options,sell at the strike price, and buy again atthe new, lower, spot price.www.CandlestickForums.com
  • 26. Managing risk in trading derivativecontracts is important.www.CandlestickForums.com
  • 27. Selling uncovered call options oruncovered put options opens the traderto potentially huge risk if the underlyingfinancial instrument goes updramatically in price.www.CandlestickForums.com
  • 28. This sort of trading in derivatives isstatistically very profitable.www.CandlestickForums.com
  • 29. That is why large institutional traders doit.www.CandlestickForums.com
  • 30. The problem for the individual investoror trader is that every so often the tradegoes bad and there is a price to pay.www.CandlestickForums.com
  • 31. Large institutions can handle the cost.Most individual investors cannot andshould typically avoid trading where thepotential for loss is great.www.CandlestickForums.com
  • 32. Online Stock Market Reviews presentedlive via the internet by Stephen Bigalowwww.CandlestickForums.com