Derivative Trading

Derivatives are contracts that are based on or derived from some underlying asset, reference rate, or index. The underlying asset can be securities, commodities, bullion, currency, livestock or anything else. Generally, derivatives are contracts to buy or sell the underlying asset at a future date, with the price, quantity and other specifications defined today.

Types of Derivatives
Derivatives can be classified into six types: Futures, Options, Swaps, Leaps, Baskets, Swaptions. But Futures and Options are two major forms of derivative trading.

Futures: A future contract involves agreement between two parties to exchange any asset or currency or commodity for cash at a certain future date, at pre-determined price. It takes place only in organized future markets and according to well established standards.

Options: An option gives the buyer the right but not the obligation to buy or sell something in the future. An option gives the holder the right but not the obligation to buy or sell something in the future. There are two types of Options: put and call. A put option is one which gives holder he right to sell at particlar number of shares (or any other commodity) at a given price, where as a whereas a call option gives you the right to buy the shares in the a finite predetermined period of time and at a predetermined price. Typically, you would buy call options if you expect the price of the underlying stock to rise, and you would buy put options if you expect the price of the stock to decline.

With Securities Laws (Second Amendment) Act 1999, Derivatives has been included in the definition of Securities. As per the Act a Derivative includes:

Derivative trading in India can take place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organization (SRO) and SEBI acts as the oversight regulator.