What are the Derivative Trading Strategies?
- 12th February 2026
- 01:00 PM
- 9 min read
Some of the common derivative trading strategies are long futures, short futures, long call options, short call options, bear put spread, and so on.
Many of the beginners are curious about derivative trading, but step back from it due to fear of losing money. The reason is that, as per the Times of India, derivative investors have lost INR 1.05 lakh crore in FY25.
If you are one of them, this blog can help you understand the different types of derivative strategies for both futures and options trading.
What are Derivative Trading Strategies?
First, let us understand what a derivative is. Derivatives are financial instruments like futures, options, swaps, and forwards. They derive their value from the underlying assets’ performance. For example, if the price of wheat rises, the value of its futures contract will also increase, and vice versa.
Now, derivative strategies refer to the usage of financial instruments to anticipate the price movements of any asset without owning it. It also helps to hedge against adverse price fluctuations.
What are the Types of Derivatives in Trading?
The different types of derivatives are futures, options, swaps, and forwards. Let us understand them deeply:
-
Forwards
Forward contracts are almost the same as futures, except that they are not available on a regulated exchange. Since these are over-the-counter (OTC) contracts, they include more counterparty risk for both parties.
-
Futures
A futures contract is a legal agreement between two parties to purchase or sell an underlying asset at a predetermined date and a fixed price. Both parties execute this contract using a regulated and organised exchange.
-
Options
An options contract provides you with the right but not an obligation to buy or sell an underlying asset at a future date and a fixed price.
-
Swaps
A swap is an agreement between two parties to exchange cash flows on a future date based on a formula. Just like forwards, these are OTC contracts and are not available on exchanges.
What are the Futures Trading Strategies?
Futures trading means buying or selling standardised contracts of an underlying asset at a predetermined price and date in the future. These standardised contracts are traded on organised exchanges and are available for a variety of assets. These include commodities, stocks, and indices.
Using the popular futures trading strategies, you can not only generate better returns but also manage your risks.
Popular Futures Trading Strategies in India
-
Long Futures Strategy
You can use this strategy to buy futures when you expect the price of an asset to increase before the expiration of the contract. You can earn decent profits if the price increases from the buying price.
-
Short Futures Strategy
You need the short futures strategy while selling futures to expect the prices of the assets decrease before the expiry date. While trading with the short futures strategy, you can earn good profits if the prices decrease from the selling price.
-
Spread Trading in Futures
Spread trading means buying and selling futures contracts at the same time to earn profit from the price differences between them. Some common spread trading strategies are calendar spreads and inter-market spreads, where contracts with different expiration dates are traded. Another strategy is the inter-market spreads, in which contracts for relevant but different assets are traded.
-
Hedging with Futures
Hedging involves trading with derivatives to minimise potential losses in an underlying asset. For instance, to restrict the risk of falling corn prices, the farmer uses a futures contract to sell the corn at a particular price in the future. It helps in hedging against potential losses if the market price of corn falls.
What are Options Trading Strategies?
Options trading strategies refer to buying and selling contracts that provide holders the right, but not the obligation, to buy or sell an underlying asset at a particular price within a predetermined expiry date. You can use options trading strategies for hedging, generating income, and managing risks.
Options Trading Strategies in India
-
Long Call Option
A long call options strategy can be used by beginners when they feel the market is bullish, with the expectation that the market will increase. In this strategy, you may face fewer risks since the maximum loss is the premium paid, while the potential to earn profit is huge. This strategy also includes taking a single position of purchasing a call option.
-
Long Put Option
The long put options strategy involves buying put options with the expectation that the price of an underlying asset will fall before its expiry. Long put options help traders to profit from the downward price movements. Traders can experience less risk to the premium paid.
-
Bull Call Spread
This strategy introduces the purchasing and selling of call options. In situations where a trader anticipates a minor increase in the underlying asset, he or she becomes somewhat optimistic. In terms of risks and benefits, there is a limit.
-
Bear Put Spread
A Bear put spread indicates that the trader is somewhat pessimistic about the market and believes that a decline is more likely than a rise. A bull spread is the exact opposite of this. This strategy is purchasing a put option and selling a put option with the same expiration date but a lower strike price.
-
Straddle
You can buy both a put and a call option with this strategy. They both have the identical expiration date and strike price. When traders expect that prices will fluctuate significantly, and the direction of the price movement is unknown, they employ this strategy.
-
Strangle
A strangle strategy can help you benefit from predictions about whether a stock’s price will change considerably. A strangle is created by buying or selling the call option with a strike price higher than the spot price of the stock and the put option with a strike price lower than the current price.
Tips for Derivatives Trading Optimisation
Follow the tips below to optimise your derivative trading:
-
Use Technical Indicators
You can use the relative strength index (RSI), Moving Average Convergence Divergence (MACD), and candlestick chart patterns to optimise derivative trading. This will give you information about momentum, support/resistance levels, and price movements.
-
Practice Seizing Positions
Practice sizing positions according to your total trading capital and risk tolerance.
-
Diversification
Invest in a variety of underlying assets, strike prices, and expiration dates while trading options.
-
Use Stop-Losses
Use stop-loss orders to reduce possible losses on options positions.
Advantages and Disadvantages of Derivative Trading
-
Advantages
-
Minimal Transaction Fees
As instruments for risk management, derivative contracts contribute to lower market transaction costs. As a result, trading derivative stocks is less expensive than trading conventional instruments like shares and debentures.
-
Risk Assessment
The price of the underlying asset of a derivative contract directly affects its value. Derivatives are therefore utilised to mitigate the risks brought on by fluctuations in the underlying asset’s price.
-
Transfer of Risk
Businesses, investors, and others can shift the risk to other parties by using derivatives.
-
Market Effectiveness
In order to ensure that the market finds equilibrium and the prices of the underlying assets are accurate, arbitrage is a crucial component of derivative trading.
-
Price Determination
To determine the price of an underlying asset, derivative contracts are frequently utilised.
-
Disadvantages
-
High Risk
Due to the value of underlying assets constantly changing, derivative contracts are extremely volatile. As a result, traders run the risk of suffering significant losses.
-
Speculative in Nature
Derivative contracts are frequently used as speculative instruments. Due to their high risk and volatile value changes, irrational conjecture frequently results in enormous losses.
-
Counterparty Risk
Futures and other derivative transactions are regulated on exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). However, over-the-counter (OTC) derivative transactions, such as forwards, lack standardisation. As a result, counterparty default is always a possibility.
Final Thoughts
Derivative strategies allow traders to control risk, predict price changes, and profit from market inefficiencies. You can do this using a variety of derivative products, including futures and options, as well as trading strategies. These include spread trading, long call options, hedging, and many more.
However, before applying these trading strategies, you must consult your financial advisor. Download the PL Capital Group – Prabhudas Lilladher application and open a trading account. PL Capital offers in-depth market research with data-driven analysis.
Frequently Asked Questions
1. What are the best derivative trading strategies beginners can use?
To study price movement with specified loss and possible profit, beginner derivatives traders can focus on low-risk options strategies like long calls and long puts.
2. How do futures strategies differ from options strategies?
While options strategies offer the right, not the responsibility, to trade, futures strategies entail a commitment for both the buyer and the seller to interact at a future period, potentially resulting in infinite risk and reward.
3. Do derivative trading strategies involve risks?
Yes, derivative strategies are highly risky since they are speculative in nature and some of them lack standardisation.
4. Which derivative strategy is the most profitable?
There is not a single derivative strategy which can be considered as the ‘most profitable’. Instead, high-reward strategies rely on market conditions, talent, and risk tolerance.
5. Can you use derivatives for hedging?
Yes, you can use derivatives for hedging to eliminate the risk of future price changes.
