Derivatives explained: futures, options and key risks
Why in the news
As retail trading in derivatives grows, explainers stress what these contracts are and why leaders warn against them.
About derivatives
Examples: Gold Futures (underlying gold) and Nifty Futures (underlying Nifty 50).
| Feature | Futures | Options |
|---|---|---|
| Obligation | Both sides, fixed price and date | None for buyer |
| Types | – | Call (buy right), Put (sell right) |
| Risk | Unlimited loss | Premium only, decays (Theta) |
Warnings
- Warren Buffett: “financial weapons of mass destruction” (2002); “time bombs” (2008).
- Madhabi Puri Buch flagged rising retail F&O and losses for over 90%; Nirmala Sitharaman, NSE’s Ashishkumar Chauhan and CEA V. Anantha Nageswaran also cautioned.
Risks
- Not a long-term asset: contracts expire, no wealth creation.
- Leverage magnifies small price moves into huge losses.
- Meant for hedging, but retail traders speculate.
- Time decay erodes premium; most buyers lose it near expiry.
Exam angle
- Call = right to buy; Put = right to sell.
- Original purpose: hedging.