Options & other
derivatives of derivatives

A future contract is known as a derivative, because its value is ultimately derived from the physical, real-world companies that it represents.

If your broker is friendly and chatty like those great Aussie brokers, he'll probably suggest sooner or later that you try something a little more exotic than plain old futures - after all, they're only leveraged by a factor of 40, whereas with options you can make a bloody fortune with almost nothing.

Brokers make a higher commission from options than they do from futures contracts, so the less scrupulous brokers will pester you to trade options in preference to futures contracts.

One of my brokers claimed that options are less risky than futures because your potential losses are limited to the price that you pay at the outset. What he didn't say was that, unlike the original futures contract, the value of your option falls as it approaches its expiry date for any given market price. Worse still, even if the price of the option is only one tick away from the price at which you bought it, you will still lose all of your investment upon its expiry - like Cinderella at midnight.

I suggest that products such as options and warrants are, for most traders, more risky than futures contracts because it is more difficult to really get a handle on how they work.  They are derivatives of futures contracts and therefore more complicated than straight futures. I'd leave them to the industrial and commercial hedgers for whom they were designed.

 

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