Investing In Derivatives, Options, Warrants and Futures
Financial Derivatives: Options, Warrants and Futures
Financial Derivatives: e.g. Options, Warrants and Futures are an interesting way to diversify or gear-up (add leverage) to an investment portfolio. They can also be used to reduce risk or hedge against market risk and other investment losses.
Here are some articles about option trading strategies, option pricing, Black Scholes, Spread trading and other higher-risk investments or derivatives, including some rather obscure investments. What are derivatives, stock options and warrants?
WARNING: None of this information is a recommendation to invest and some of the derivatives discussed here can be very risky.
Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.
Warrants and Options
Warrants and Options can be used to protect you portfolio or add leverage for a limited amount of time. These are contracts that give you the option (i.e. the right, not the obligation) to buy or sell ("call" or "put") something (a share, stock, commodity etc.) at a certain price (The Strike Price) on a certain date.
Warrants and Options may be bought and sold on any date, but the price is variable and depends on the value and volatility of the underlying asset, time left to maturity. The price can be calculated using complex equations...
Investing in Warrants and Options
Preference shares are a different class of share to "Ordinary" Shares and pay out to their holders before other classes of share (but after bond holders and bank debt) generally making them safer. They are a useful variant to ordinary shared to reduce the risk of a portfolio.
Financial Spread Trading
Spread Trading Shares, Commodities and other Markets
Spread Trading can be a very risky (but tax-free) way to play the market or it can be used to hedge against market risk. Spread-trading derives a profit if a certain outcome occurs. It is however a legitimate investment technique and has tax-advantages over owning the asset on which you are betting. Also you can go long or short (i.e. make money from the market moving in either direction)
Option Pricing (Black Scholes Equation)
Ever wondered how to price an option or a warrant? Here is an article explaining how this is done This is the standard method of working out the value of options or warrants from the value and volatility of the underlying asset, time to maturity etc. based on physics equations used to model movement of atoms (Brownian Motion) i.e. assumes the markets are random.