A derivative is a financial security that derives its value from an underlying asset or a group of underlying assets. It derives its price from changes in the underlying asset. Common underlying assets include bonds, commodities, currencies, interest rates, stocks and indices.
A future is a type of derivative contract that binds the parties to transact an asset at a predetermined future date and price. The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.
Futures can be used to hedge the price movement of the underlying asset to help prevent losses from unfavourable price changes. It also allows investors to speculate on the direction of the underlying.
An option is a type of derivative instrument that bases its value on the underlying security. An options contract offers the buyer the opportunity to buy or sell- depending on the type of contract they hold- the underlying asset. Unlike futures, the holder of an option is not required to buy or sell the asset if they choose not to.
Call options allow the holder to buy the asset at a stated price within a specific timeframe
A put option allows the holder to sell the asset at a stated price with a specific timeframe
A commodity is a basic good that is interchangeable with other good of the same type. Commodities are most often the inputs used in the production of other goods and services. Some traditional examples include: Grains, Golf, Oil, Natural Gas
Basis if the difference between the spot price and the futures price (Basis= Spot price-futures price). There are two types of basis; positive basis that indicates a futures discount (Backwardation) and Negative Basis that indicates a futures premium (Contango)
Mark-to-Market (MTM) refers to the daily settling of gains and losses due to changes in the market value of the security.
Going short refers to selling a stock or futures contract that is not owned by the seller.
Going long refers to buying a stock or futures contract
Margin is an amount of money that must be pledged to open and maintain a position in a future or options contract. This amount helps to ensure that market participants can meet their obligations as the prices of the contracts change daily
Algorithmic trading (algo-trading) makes sure of a computer program that follows a defined set of instructions (the algorithm) to place a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human traded.