Derivatives

• Futures ContractIntermediate6 min read

  A futures contract is a standardised, exchange-traded agreement to buy or sell an asset at a set price on a future date.

• OptionsAdvanced6 min read

  An option gives its buyer the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price until or on a set date.

• Contract for DifferenceIntermediate5 min read

  A contract for difference is an agreement with a broker to exchange the change in an asset's price, so you can trade it without owning it.

• Implied VolatilityAdvanced5 min read

  Implied volatility (IV) is the future volatility that the market is pricing into an option; higher IV means more expensive options.

• Open InterestIntermediate5 min read

  Open interest (OI) is the total number of futures or options contracts that are open and not yet closed or settled; rising OI means new money entering positions.

• SettlementIntermediate4 min read

  Settlement is how a contract is completed: cash settlement pays the price difference in money, while physical delivery transfers the actual asset.

• DerivativeIntermediate4 min read

  A derivative is a contract whose value comes from the price of something else — a share, index, currency, commodity or cryptocurrency — such as futures and options.

• Option GreeksAdvanced4 min read

  The Greeks measure how an option's price reacts to changes: delta (underlying price), gamma (change in delta), theta (time), vega (volatility) and rho (interest rates).

• Option PremiumIntermediate4 min read

  The option premium is the price the buyer pays the seller for an option; it is the most an option buyer can lose.

• Strike PriceIntermediate4 min read

  The strike price is the fixed price at which an option holder can buy (call) or sell (put) the underlying asset.

• BasisAdvanced4 min read

  The basis is the difference between a futures price and the spot price of the same asset; it narrows toward zero as the contract approaches expiry.

• Contango and BackwardationAdvanced4 min read

  Contango is when futures prices are above the spot price, typically rising with later expiries; backwardation is when futures trade below spot.

• Cost of CarryAdvanced4 min read

  Cost of carry is the net cost of holding an asset until a future date: financing, storage and insurance, minus any income such as dividends or interest. In theory, a futures price equals the spot price plus the cost of carry.

• Commitments of Traders ReportIntermediate4 min read

  The Commitments of Traders report, published weekly by the US CFTC, breaks down open interest in futures markets by type of trader, such as commercial hedgers and speculators. It is released on Fridays with data as of the preceding Tuesday.

• Expiration DateIntermediate4 min read

  The expiration date is the last day an option or futures contract exists; after it, the contract is exercised, settled or becomes worthless.

• Fed Funds FuturesAdvanced4 min read

  Fed funds futures are exchange-traded contracts whose price reflects the expected average federal funds rate in a given month. Traders use them to infer the market-implied probability of future Federal Reserve rate changes.

• Forward PointsAdvanced4 min read

  Forward points are the amount added to or subtracted from the spot exchange rate to get the forward rate. They mainly reflect the interest-rate difference between the two currencies over the contract’s life.

• Intrinsic Value and Time ValueAdvanced4 min read

  An option's premium has two parts: intrinsic value, what it would be worth if exercised now, and time value, the extra paid for the chance of a better move before expiry.

• ISDAAdvanced4 min read

  The International Swaps and Derivatives Association is the industry body for over-the-counter derivatives. Its standard ISDA Master Agreement sets the legal terms — including what happens on default — for most swaps between institutions.

• Non-Deliverable ForwardAdvanced4 min read

  A non-deliverable forward is a currency forward settled in cash: instead of exchanging the full amounts, the parties pay the difference between the agreed rate and the market rate at maturity. NDFs are common for currencies with capital controls.

• Option Pricing ModelsAdvanced4 min read

  Option pricing models estimate an option’s fair value. Black-Scholes (1973) gives a closed-form price assuming constant volatility; binomial models use a tree of up and down moves and handle early exercise; Monte Carlo methods simulate many price paths; the Heston model lets volatility itself change randomly.

• Tom-NextAdvanced4 min read

  Tom-next (“tomorrow to next day”) is a short currency swap that rolls a spot position forward by one business day. Forex brokers use it, or something similar, to work out the daily financing charge or credit on positions held overnight.

• Covered CallIntermediate4 min read

  A covered call means owning shares (usually 100 per contract) and selling a call option on them. The premium gives extra income, but if the price rises above the strike, the shares can be called away and the upside is capped.

• Put-Call RatioIntermediate4 min read

  The put-call ratio divides the volume (or open interest) of puts by that of calls. A high ratio shows heavy demand for protection; traders often read extremes as contrarian sentiment signals.

• Straddle and StrangleAdvanced5 min read

  A long straddle buys a call and a put with the same strike and expiry; a strangle uses an out-of-the-money call and put, which costs less. Both profit from a big move in either direction and lose if price stays still. Selling them is the opposite bet.

• Iron CondorAdvanced4 min read

  An iron condor sells an out-of-the-money put spread and an out-of-the-money call spread on the same expiry. It earns the premium if price stays between the short strikes, and the bought options cap the maximum loss.

• 0DTE OptionsAdvanced4 min read

  0DTE options are options traded on their expiry day — zero days to expiration. They are cheap and react violently to small price moves, so gains and losses build very quickly, and most expire worthless.

• Exercise and AssignmentIntermediate4 min read

  Exercise is when an option holder uses the right to buy (call) or sell (put) the underlying at the strike price. Assignment is the other side: the option seller is chosen to fulfil that obligation and must sell or buy the shares at the strike.

• Vertical SpreadIntermediate4 min read

  A vertical spread buys one option and sells another of the same type and expiry at a different strike. It caps both the maximum gain and the maximum loss; a bull call spread, for example, profits from a moderate rise at a lower cost than a plain call.

• Butterfly SpreadAdvanced4 min read

  A butterfly spread combines three strikes: buy one lower-strike option, sell two middle-strike options, and buy one higher-strike option, all with the same expiry. It costs little, risks only the premium and pays most if price ends exactly at the middle strike.

• LEAPSIntermediate4 min read

  LEAPS are long-dated options with expirations up to about three years away. A LEAPS call gives exposure to a stock's rise for less capital than buying the shares, while the long time frame gives the trade more time to work.

• Options ChainBeginner4 min read

  An options chain is the table of every listed call and put for an underlying asset, grouped by expiry date and strike price. Each row shows prices such as bid, ask and last, plus volume, open interest and often implied volatility and the Greeks.

Each term is defined in one sentence. Terms marked “Article in preparation” will get a full step-by-step article.

• American and European Options

  IntermediateArticle in preparation

  American-style options can be exercised at any time up to expiry; European-style options only at expiry. Most US stock options are American, while many index options, such as those on the S&P 500 index, are European.

• Auto-DeleveragingADL

  AdvancedGlossary

  If a liquidated position cannot be closed in the market and the exchange's insurance fund runs dry, the exchange may shrink the winning positions on the other side to cover the gap — auto-deleveraging. Traders with the biggest profits and leverage are usually first in the queue.

  The exact rules and formulas differ between brokers and exchanges — check your platform’s documentation.

• Binary Options

  BeginnerArticle in preparation

  A binary option pays a fixed amount if a yes-or-no condition is true at expiry — say, the price is above a level — and nothing otherwise. Many online binary platforms have been fraudulent, and EU and UK regulators banned their sale to retail clients.

  Rules differ between countries; this is general information, not tax or legal advice.

• Box Spread

  AdvancedGlossary

  A box spread combines a bull call spread and a bear put spread with the same strikes, so its value at expiry is fixed at the difference between the strikes. In effect it lends or borrows at an implied interest rate.

• Calendar Spread

  AdvancedGlossary

  A calendar spread sells a near-dated option and buys a longer-dated one at the same strike. It profits mainly from the short option's faster time decay, ideally with price near the strike at the first expiry.

• Cash-Secured Put

  IntermediateArticle in preparation

  A cash-secured put is selling a put option while keeping enough cash to buy the shares at the strike if assigned. The seller collects the premium and may end up owning the stock at a price they were happy with — the first leg of the “wheel” strategy.

• Currency and FX Swaps

  AdvancedGlossary

  An FX swap pairs a spot currency exchange with a reverse exchange at a later date. A cross-currency swap also exchanges interest payments in the two currencies over its life. Both let firms borrow in one currency against another.

• Daily Price Limit

  IntermediateGlossary

  A daily price limit is the most a futures contract may rise or fall in one session under exchange rules. When price hits it the market is “limit up” or “limit down”, and trading may pause or be allowed only within the limit.

• Diagonal Spread

  AdvancedGlossary

  A diagonal spread buys and sells options of the same type with different strikes and different expiries — a mix of a vertical and a calendar spread. A common version is buying a longer-dated call and selling a nearer, higher-strike call against it.

• Exchange for PhysicalsEFP

  AdvancedGlossary

  An exchange for physicals is a privately agreed swap of a futures position for an equal position in the physical commodity, reported to the exchange. Commercial users use it to set up or unwind hedges.

• Exotic Options

  AdvancedGlossary

  Exotic options have non-standard terms, such as Asian options (paid on the average price), barrier options (that switch on or off at a level), lookback options and chooser options. They mostly trade over the counter between institutions.

• First Notice DayFND

  IntermediateGlossary

  First notice day is the first day on which holders of a long futures position can be told to take physical delivery. Speculators who do not want the commodity usually roll or close their positions before it.

• Forward Contract

  IntermediateArticle in preparation

  A forward contract is a private agreement to buy or sell an asset at a set price on a future date. Unlike futures, forwards are customised, trade over the counter and are not marked to market daily, so each side carries the other's credit risk.

• Front Month and Back Months

  IntermediateArticle in preparation

  The front month is the futures contract closest to expiry, usually the most traded; back months are the later expiries. Traders roll from the front month into the next one before it expires.

• Futures Commission MerchantFCM

  AdvancedGlossary

  A futures commission merchant is a firm that accepts customers' futures orders and holds their margin money — in effect, a futures broker. In the US, FCMs must register with the CFTC and keep customer funds segregated.

• Futures Convergence

  AdvancedGlossary

  Convergence is the futures price moving towards the spot price as the contract approaches delivery, so the basis shrinks to almost zero at expiry. If it did not, traders could profit from the gap with little risk.

• Futures Fair Value

  AdvancedGlossary

  Fair value is the theoretical price of a futures contract given the spot price, interest rates and expected dividends. Pre-market commentary compares stock index futures with fair value to judge where the cash market will open.

• Futures Spreads

  AdvancedGlossary

  A futures spread holds a long and a short futures position at once: in different months of the same commodity (calendar spread) or in related markets (inter-commodity spread). Because the legs offset, spreads usually need less margin.

• Index Price and Mark Price

  AdvancedArticle in preparation

  Futures exchanges blend spot prices from several venues into an index price, then derive a mark price from it. Your unrealised profit and liquidation are judged on the mark price, so a sudden wick on one exchange should not wipe out your position.

  The exact rules and formulas differ between brokers and exchanges — check your platform’s documentation.

• Interest Rate SwapIRS

  AdvancedArticle in preparation

  In an interest rate swap, one side pays a fixed rate and the other a floating rate on the same notional amount, which itself never changes hands. Companies use them to switch loans between fixed and floating rates.

• Linear and Inverse Contracts

  AdvancedGlossary

  With USDT-margined (linear) futures your margin and profit are counted in stablecoins. With coin-margined (inverse) futures they are counted in the coin itself, so a long BTC position on BTC margin is hit twice when bitcoin falls.

• Long/Short Ratio

  IntermediateGlossary

  Exchanges publish how their futures traders lean: the share of accounts or positions betting up versus down. When nearly everyone leans one way, a sharp move against the crowd becomes more likely — but each venue measures it differently.

  The exact rules and formulas differ between brokers and exchanges — check your platform’s documentation.

• Max Pain

  IntermediateGlossary

  Max pain is the strike price at which option buyers, taken together, would collect the least at expiry. Some traders believe prices drift towards it into expiry, but the evidence for that is weak.

• Naked Options

  AdvancedArticle in preparation

  A naked option is one sold without owning the underlying or holding an offsetting position. A naked call has theoretically unlimited risk, so brokers allow it only at their highest approval levels and with large margin.

• Option Writer

  IntermediateGlossary

  An option writer is the seller of an option. The writer collects the premium up front and takes on the obligation to buy or sell the underlying if the option is exercised.

• Options Collar

  IntermediateArticle in preparation

  A collar protects shares you own by buying a put below the current price and paying for it by selling a call above it. Losses are capped at the put's strike, but so are gains at the call's strike — a common way to hedge a big position cheaply.

• Options on Futures

  AdvancedGlossary

  Options on futures have a futures contract as their underlying: exercising one gives you a long or short futures position. They are widely used on commodities, interest rates and stock index futures.

• Payoff Diagram

  BeginnerArticle in preparation

  A payoff diagram plots a position's profit or loss at expiry across a range of prices for the underlying. It makes option strategies easy to read: a bought call is flat below the strike and rises above it, minus the premium paid.

• Position Limits

  AdvancedGlossary

  Position limits cap how many futures or options contracts one trader can hold in a market. Exchanges and regulators set them to stop any single participant from cornering or manipulating the market.

• Put-Call Parity

  AdvancedGlossary

  Put-call parity links European call and put prices with the same strike and expiry: call − put = share price − present value of the strike (without dividends). If prices drift out of line, arbitrage pushes them back.

• Ratio Spread

  AdvancedGlossary

  A ratio spread buys one number of options and sells a different number at another strike, such as buying one call and selling two higher-strike calls. It can be cheap or even pay a credit, but leaves open-ended risk on one side.

• ROE in Futures

  BeginnerGlossary

  Crypto exchanges show a position's return on the margin you committed, labelled ROE. Because margin is small, ROE magnifies price moves: with 20× leverage a 2% price move reads as a 40% ROE, in either direction.

• Settlement Price

  IntermediateGlossary

  The settlement price is the official end-of-day price an exchange sets for each futures contract. It is used to mark every open position to market and calculate the day's margin gains and losses.

• SPAN MarginSPAN

  AdvancedGlossary

  SPAN (Standard Portfolio Analysis of Risk) is a widely used method, developed by CME, that sets futures and options margin from the worst likely loss of a whole portfolio across a range of price and volatility scenarios.

• Spread Betting

  IntermediateGlossary

  Spread betting, offered mainly in the UK and Ireland, lets you bet an amount per point on a market's move without owning the asset. Like a CFD it is leveraged, and in the UK profits are currently free of capital gains tax for most individuals.

  Rules differ between countries; this is general information, not tax or legal advice.

• Structured Products

  AdvancedGlossary

  Structured products are pre-packaged notes that combine a bond with options to deliver a set payoff — capital protection, a capped upside or a high coupon that ends early (autocallables). Returns depend on the issuing bank staying solvent, and the pricing is often opaque.

• Swap

  IntermediateArticle in preparation

  A swap is a derivative in which two parties agree to exchange streams of cash flows, for example fixed interest payments for floating ones. Swaps trade over the counter and are mostly used by banks, companies and funds to manage risk.

• Swaption

  AdvancedGlossary

  A swaption is an option to enter into an interest rate swap on agreed terms at a future date. Banks and companies use swaptions to protect against interest rates moving before they need to borrow.

• Synthetic Positions

  AdvancedGlossary

  A synthetic position uses options to mimic another position. Buying a call and selling a put at the same strike and expiry behaves like owning the stock (a synthetic long); the reverse mimics a short. Put-call parity is what links them.

• Underlying Asset

  BeginnerArticle in preparation

  The underlying asset is whatever a derivative's value is based on: the share behind a stock option, the oil behind a crude futures contract, the index behind a CFD. The derivative's price follows the underlying, often with leverage.

• Warrants

  AdvancedGlossary

  A warrant gives the right to buy a company's shares at a set price before an expiry date, much like a call option. The difference is that warrants are issued by the company itself, so exercising them creates new shares and dilutes existing holders.