heydaralon wrote:A derivative is just a bet I thought. Its where you bet something is gonna increase, decrease, or stay the same in value. I have no idea how the fuck to make money off them though.
They are good to hedge risk. If you have a long position in a gold mining company, for example, though the company runs well, a reversal in the gold futures market could harm your position a bit. But you can hedge that position in the options markets (a kind of derivative on stocks) by purchasing a put contract on a gold ETF. You bet that the gold market will be lower, purchasing the right to sell so many shares of the ETF at a higher price than you project it to be. If gold prices plummet, your derivative bet will do well. If it increases, then it will do badly. If it trades sideways, you will lose a little. You could do the same thing by shorting a call option. Just be ready to unwind your derivatives on a dime, and keep track of expiration dates since you have an obligation to fulfill the contract on that date, which is a good thing if the gold market did indeed collapse, since you will purchase the ETF at the current lower price and sell it to the other party for a higher price. But if it doesn't fall, then sell it early.
Also, if you have a long position on some stock, you might want to trade on volatility of that position. So you are making relatively frequent trades of derivatives based on some of the shares you possess in your portfolio.
There are derivatives for weird shit like the weather as well. You can use weather derivatives to manage risk in futures markets (like corn and oats) where future weather can result in drastic swings in price and increased volatility.
