Dear Traderji, can u tell me .......... Why there is less gathering at derivatives (option) end as compared to equity if there is low risk at derivatives end ?????????
Can anybdy will explain me ??????????
Options/derivatives are in no way a lower risk instrument than spot market.
Derivatives are complex instruments, which could provide leverage of all ranges. They magnify both profit and loss.
if you are a buyer, you could pay a small prem to take a huge exposure in the market, instead of buying the whole lot of shares.
Example :
suppose share ABC is trading at 100
if you take a view of the share to appreciate over time,
in spot/cash mkt, if you want to take a position on 1000 shares,
you would need 100*1000 = 100,000
whist with the same view, you could buy a call option at 100 with a defined time expiry and pay a premium which is far lesser than the amount you need to buy 1000 shares. assuming the premium is 10
you would pay 10*1000 = 10,000
for an option, you would see a large % gain if the share price rises.
If the price does not rise or fall during the lifetime of the option, leverage can magnify the investment's %loss.
the risk is pre-determined in this case(buy option).
-------------------------
however, having said that, Options are good if you understand how they work and use them within your risk-appetite.
