How Derivatives trading happens?
Derivatives give traders a major benefit in the form of leverage. Financial Leverage is basically any action that can mobilize larger resources by using lesser resource. Levers are powerful. It was Archimedes who said, “Give me a long enough lever and a fulcrum to place it and I shall move the World”. Derivatives leverage a small payment in the form of a premium (option) or margin money (futures) to trade in a “Lot” which is typically 10 to 50 times larger than the payment. For example with a small bet (margin) of Rs.25,000/- we can buy and sell a ton of copper worth Rs.430,000/- (one lot). Even a small 1% profit on the lot is Rs.4300/- which is a huge 17.2% profit on the margin. The Down Side The down side is that the loss is also highly leveraged. Remember the leverage works both ways. If there is a small loss of 1% in the Lot trading, we lose a huge 17.2% of the CAPITAL. This happen by default there is no way that we can postpone the capital erosion. To do the next trade we will nee
