Speculation Strategies
Speculation strategies in derivatives involve taking a position with the expectation of making a profit based on the price movements of an underlying asset. Here are some common speculation strategies used in derivatives trading:
- Long Call: This involves buying a call option on an underlying asset, which gives the holder the right, but not the obligation, to buy the asset at a predetermined price (strike price) before the expiration date. If the price of the asset rises above the strike price, the holder can exercise the option and buy the asset at the lower strike price and sell it at a higher market price, making a profit.
- Short Call: This involves selling a call option on an underlying asset that the seller does not own. If the asset price does not rise above the strike price, the seller keeps the premium, but if the asset price rises above the strike price, the seller may be required to sell the asset at a loss.
- Long Put: This involves buying a put option on an underlying asset, which gives the holder the right, but not the obligation, to sell the asset at a predetermined price (strike price) before the expiration date. If the price of the asset falls below the strike price, the holder can exercise the option and sell the asset at the higher strike price and buy it back at a lower market price, making a profit.
- Short Put: This involves selling a put option on an underlying asset that the seller does not own. If the asset price does not fall below the strike price, the seller keeps the premium, but if the asset price falls below the strike price, the seller may be required to buy the asset at a higher price than the market price.
- Futures Trading: This involves taking a position in futures contracts based on the expected price movements of an underlying asset. Traders can go long or short on futures contracts, depending on their expectations of price movements.
- Spread Trading: This involves taking opposite positions in two or more related contracts to profit from the price differences between them. For example, a trader may buy a call option on one stock and sell a call option on another stock in the same industry.
- Straddle Trading: This involves buying both a call and put option on an underlying asset with the same strike price and expiration date, in anticipation of a large price movement. The profit comes from the difference between the strike price and the market price.