🔰 What Are Derivatives? — Derivative 101
A Derivative is a contract between 2 parties whose value is "derived" from the price of an underlying asset, such as stocks, indices, gold, oil, interest rates, or currencies.
Why use derivatives?
- Hedging (Risk Management): A farmer sells rice forward to lock in the price — protecting against price declines.
- Speculation: Predicting price direction — using a small amount of money to control a large position (Leverage).
- Arbitrage: Buying and selling simultaneously in different markets where prices differ.
📜 Futures (Forward Contracts)
Futures are contracts to buy/sell an asset in the future at a pre-determined price — everything is standardized: contract size, expiration date, and settlement method.
Futures in Thailand (TFEX — Thailand Futures Exchange):
- SET50 Futures (S50): Based on the SET50 Index — 1 contract = 1,000 THB × index points — Initial Margin ~10,000-15,000 THB/contract
- Single Stock Futures (SSF): Based on individual stocks (PTT, SCB, ADVANC, AOT) — 1 contract = 1,000 shares — Margin 15-25%
- Gold Futures (GF): Based on 96.5% gold price — 1 contract = 50 baht-weight of gold — Margin ~15,000-25,000 THB
- Gold Online Futures (GO): Based on Gold Spot (XAU/USD) — 1 contract = 10 Troy Oz
- USD Futures (USD): Based on USD/THB — 1 contract = 1,000 USD
Key Futures Mechanisms:
- Initial Margin — The upfront collateral required to open a position (typically 5-25% of the contract value)
- Maintenance Margin — The minimum margin that must be maintained — if it falls below this level = Margin Call (must deposit more funds)
- Mark-to-Market (M-T-M) — Profit/loss is adjusted daily based on market prices — gains/losses are transferred in and out of the account every day
- Long vs Short: Long = profits when price rises | Short = profits when price falls
- Expiry Date: Every Futures contract has an expiration date (typically March, June, September, December) — you must close the position before expiry or Rollover to the next series
🎯 Options (Right to Buy/Sell)
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Options are contracts that give the holder the right (but not the obligation) to buy (Call) or sell (Put) an underlying asset at a specified price within a specified time.
- Call Option: The right to buy — buy when you expect the price to rise
- Put Option: The right to sell — buy when you expect the price to fall
- Strike Price: The price at which the option can be exercised
- Premium: The price paid to purchase an option — similar to an insurance premium
- Expiration Date: The date the option expires — if not exercised before expiry = the option becomes worthless
Option Style:
- American Option: Can be exercised any day before expiration
- European Option: Can only be exercised on the expiration date — SET50 Index Options are European style
Moneyness:
- ITM (In The Money): Has Intrinsic Value — Call: Spot > Strike | Put: Spot < Strike
- ATM (At The Money): Spot ≈ Strike — Premium = pure Time Value
- OTM (Out of The Money): No Intrinsic Value — Call: Spot < Strike | Put: Spot > Strike
🔢 The Greeks — Measuring Option Price Sensitivity
| Greek | What It Measures | Typical Value | Meaning |
|---|
| Delta (Δ) | Sensitivity to Underlying price | Call: 0 to 1
Put: -1 to 0 | Delta=0.5 → Underlying rises 1 THB, Option rises 0.5 THB; ATM ≈ 0.5; ITM → 1.0; OTM → 0 |
| Gamma (Γ) | Rate of change of Delta | ATM: highest | ATM options have high Gamma → Delta changes rapidly → profit/loss accelerates |
| Theta (Θ) | Value decay over time (Time Decay) | Always negative | Theta=-0.05 → loses 0.05 THB per day; near Expiry → Theta accelerates; Option sellers benefit from Theta |
| Vega (ν) | Sensitivity to volatility (Implied Volatility) | ATM: highest | IV increases 1% → Option price rises by Vega; during volatile markets IV is high → Options are expensive |
| Rho (ρ) | Sensitivity to interest rates | Very low (in Thailand) | Thai options are minimally sensitive to interest rates — not a major concern |
💡 For Beginners: Just remember Delta (direction) and Theta (time) — Option Buyers fight against Theta every day, Option Sellers earn money from Theta
🎯 Popular Options Strategies
Covered Call
Hold 100 shares → Sell a Call OTM → Collect Premium
Maximum profit = Premium + (Strike − stock purchase price)
Risk: If price drops beyond the Premium received → Loss
Protective Put
Hold shares + Buy a Put = Insures the stock price won't fall below Strike
Similar to buying insurance — pay a Premium to protect against heavy losses
Cost = Premium — if the stock rises, the Put is not exercised
Spread Strategies:
- Bull Call Spread: Buy ATM Call + Sell OTM Call — Limited profit, limited loss, lower cost than a single Call
- Bear Put Spread: Buy ATM Put + Sell OTM Put — Controlled-risk bearish speculation
- Straddle: Buy Call + Put at the same Strike — Speculate on high volatility (direction-agnostic), used before major news announcements
- Strangle: Buy OTM Call + OTM Put — Cheaper than Straddle but requires a larger price movement
📄 DW · Warrant · CFD
- Warrant: Issued by a listed company — gives the right to buy common shares of the company at a specified price (Conversion Price) — when exercised, the company issues new shares → Dilution Effect
- DW (Derivative Warrant): Issued by a securities company (not the listed company) — based on stock or index prices without issuing new shares — very high Leverage (5-15x) — very high risk — suitable for short-term speculation
- CFD (Contract for Difference): A contract on the price difference — speculating on asset prices without holding the actual asset — popular in Forex, stocks, and indices — features high Leverage and Swap fees
⚠️ DW Warning: DWs have an expiration date — upon expiry if OTM = the value becomes zero (Worthless) — you lose the entire investment. DWs continuously issue new Series and have reference price adjustments when stocks go XD — you must understand these before buying.
⚠️ Disclaimer: Derivatives carry extremely high risk due to Leverage — you may lose all or more than your investment (in the case of Futures/CFD) — This content is for educational purposes only.
