DERIVATIVES

• A derivative is a contract between two parties

which derives its value/price from an
underlying asset. The most common types of
derivatives are futures, options, forwards and
swaps.
• Description: It is a financial instrument which
derives its value/price from the underlying
assets.
 Futures contract
A futures contract is a contract between two
parties where both parties agree to buy and sell a
particular asset of specific quantity and at a
predetermined price, at a specified date in future.
Example- If you want to buy 550 shares of HDFC
BANK @1500 then total amount payable is
825000. If you buy current month future then you
have to pay only 145000 in future contract for
same quantity.
 Option contract
• Options are financial derivatives that give
buyers the right, but not the obligation, to buy
or sell an underlying asset at an agreed-upon
price and date.
• Options trading can be used for both hedging
and speculation, with strategies ranging from
simple to complex.
TWO TYPES OF OPTIONS
 FORWARD CONTRACT
• A forward contract is a customizable derivative
contract between two parties to buy or sell an
asset at a specified price on a future date.

• Forward contracts do not trade on a

centralized exchange and are considered over-
the-counter (OTC) instruments. Used by
Financial institutions.
 SWAP CONTRACT
• A swap is a derivative contract through which two
parties exchange the cash flows or liabilities from
two different financial instruments.
Example currency Swap- buy A currency swap is a
transaction in which two parties exchange an
equivalent amount of money with each other but
in different currencies. The parties are essentially
loaning each other money and will repay the
amounts at a specified date and exchange rate.
 GLOSSARY OF DERIVATIVES
• At-the-money option- An option that has a
strike price equal to the underlying interest’s
price or the strike price which is the closest to
the underlying interest’s price.
• In-the-money option-Either a call option that
has a strike price below the underlying
interest’s price, or a put option that has a
strike price above the underlying interest’s
price.
• Out-of-the-money option-Either a call option
that has a strike price above the underlying
interest’s price, or a put option that has a
strike price below the underlying interest’s
price.
• Averaging down-Buying more of a stock or an
option at a lower price than the original
purchase to reduce the average cost.
• Break-even point-The market price at which a
trading strategy generates zero profit and
causes no loss.
• Delta-A measure of the marginal variation of
an option’s premium based on the marginal
variation of the underlying interest’s price, all
other things being equal.
• Equity option-An option on shares of an
individual common stock or exchange traded
fund.
• European option-An option which the holder
can only exercise on the expiry date.
• American option-An option that the holder
may exercise at a time of their choosing until
the expiry date.
• Fundamental analysis-A method of predicting
stock prices based on the study of earnings,
sales, dividends, and so on.
• Hedge-A position established with the specific
intent of protecting an existing position. For
example, an owner of common stock may buy
a put option to hedge against a possible stock
price decline.
• Implied volatility-The volatility of the
underlying interest’s price which is
determined using an option pricing model and
is implied in the option’s premium.
• Settlement- The process by which the
underlying stock is transferred from one
brokerage account to another when equity
option contracts are exercised by their owners
and the inherent obligations assigned to
option writers.
• Index option-An option whose underlying
interest is an index. Generally, index options
are cash-settled.
• Institution FII/DII - A professional investment
management company. Typically, this term
describes money managers such as banks,
pension funds, mutual funds and insurance
companies.
• Limit order-A trading order placed with a
broker to buy or sell stock or options at a
specific price
• Liquid market- Trading environments characterized by
high trading volume, a narrow spread between the bid
and ask prices, and the ability to trade larger sized orders
without significant price changes.
• Market order- A trading order placed with a broker to
immediately buy or sell a stock or option at the best
available price.
• Open interest- The number of option contracts with the
same characteristics (strike price and expiry date) on a
particular underlying interest that have not yet been
exercised or bought back. If both the buyer and the writer
of an option execute an opening trade, the open interest
increases. if both the buyer and the writer of an option
execute a closing trade, the open interest decreases.
• Resistance- A term used in technical analysis
to describe a price area at which rising prices
are expected to stop or meet increased selling
activity. This analysis is based on historic price
behaviour of the stock.
• Support- A term used in technical analysis to
describe a price area at which falling prices are
expected to stop or meet increased buying
activity. This analysis is based on previous
price behaviour of the stock.
 Option buying strategy
• 30 min candle closing strategy
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