By Hazem Alhalabi
By Tamta Suladze

Derivatives Trading in 2024 - How to Start and Make Money?

The Derivatives Trading Market is Growing - Here’s Why

Discussing financial markets has become very common recently as the demand for multiple sources of income increases and technology advances in various industries. Today, more non-institutional investors are becoming more interested and involved in trading.

This necessitated financial institutions and providers offering the best investing instruments to respond to changing trends. In this context, derivatives have grown in popularity due to their distinct characteristics compared with classic financial instruments.

In a nutshell, derivatives trading uses traditional securities to implement unconventional investing techniques that do not require instant ownership transfer or claiming risks. So, is derivatives trading still lucrative in 2024? Let’s find out.

Key Takeaways

  • Derivatives are contracts between two parties that agree to trade a particular asset at an agreed price and date in the future.

  • These financial instruments do not involve asset ownership, but contracts derive value from the security market price.

  • Derivatives are risk management practices that allow traders to benefit from future gains without paying large upfront sums.

  • Futures, forwards, swaps and options are four types of derivatives contracts.

Understanding Derivatives Trading

Derivatives in trading are contracts that entail speculating on the future price of a particular asset and trading them in the present without actually owning the underlying asset.

Derivative contracts allow investors to buy or sell securities at some point in the future at a predetermined price. The trade price, date of execution (expiration date) and subject instrument(s) are agreed upon and stated in the contract.

These trading instruments date back to the 1840s when the first commodity derivative-like exchange took place at the Chicago Board of Trade. However, the modern style of financial derivatives trading started in the 1970s when the Chicago Mercantile Exchange introduced derivatives contracts.

There are different types of derivatives. Some oblige the participants to undertake the trade on the contract expiration date, while others give traders the option to execute the trade.

types of derivatives securities

Why Are Derivatives Important?

Derivatives are more flexible than classic trading instruments. Investors use these contracts to speculate on the future price of an asset and potentially earn big profits, and institutional investors use these techniques to hedge against substantial market risks.

Example of Derivatives Risk Mitigation

Hedge funds that trade Forex would use derivatives with the option to buy gold as a risk mitigation measure against their Forex investments. 

Since both assets are inversely correlated, if the currency investment hits the jackpot, the company can pass on the derivative option. However, if the currency market declines, gold is more likely to thrive, and the company will execute their right to buy gold.

Types of Derivative Contracts

Types of derivatives contracts

Derivatives add more variation to the trader’s portfolio, enabling them to take on risky positions and execute four types of derivative contracts.


Futures contracts entail buying or selling a certain financial instrument at a predetermined price and date. In these contracts, both buyer and seller lock the asset value at which the buyer can purchase upon expiration, regardless of the current market price.

For example, if Apple’s stock price is $195 and an investor predicts these shares will grow in several months, they can sign a one-year futures contract with a seller at a predetermined price of $200.

When the expiration date arrives, the buyer must purchase stocks at $200 regardless of the current price. If the stock now costs $202, the buyer is in profit. However, the buyer will lose if the price drops or remains the same.


In official market settings, derivatives have preset commodity quantities, and investors cannot trade one oil barrel. For example, the Chicago Mercantile Exchange determines the oil futures derivatives to include 1,000 barrels of oil in a single contract.

However, forwards are non-standardised futures contracts, meaning that participants may privately agree to buy or sell any security in any quantity, such as 1 or 1,000 Apple stocks.

Forwards are traded on private OTC exchanges with more lenient regulations and requirements, allowing for the creation of customised trades that suit buyers and sellers.


Options are similar to futures and forward contracts. However, the twist here is that they do not oblige participants to undertake the agreed-upon trade. Instead, traders have the “option” to fulfil the contract specifications, hence the name.

There are different categories of options contracts and execution types. American and European options derivatives are two ways to utilise these contracts, either on the expiration date or at any given moment.

Additionally, call and put options are two ways to exercise the trader’s right. Call options allow traders to buy (long) the underlying asset, while put options allow traders to sell (short) the security in question.

These advanced instruments are used as risk mitigation techniques, where the investor speculates on the asset’s future price and undertakes the contract only if the market moves in a favourable direction. Otherwise, the trader has the right to decline their right to buy/sell the specified assets if deemed unprofitable.


Swap derivatives are contracts between two parties allowing them to exchange instruments like cash flow, interest rates, commodities or bonds.

These tools allow companies to swap their unfavourable interest rates for more favourable ones. For example, companies undertaking loans with floating rates can swap the interest rate with other corporations with fixed rates.

Additional swap exchange can involve commodities with floating prices for those with more fixed prices. As such, swap derivatives are mostly used to exchange securities with different financing structures or interest rates to mitigate risks and improve financial performance.

Top Derivatives Market Players

New traders and those who want to dip their toes in the financial market world are more likely to use traditional investing instruments because they are more straightforward. 

Who can trade with derivatives

Derivatives can be somewhat complicated for the average user because they entail some calculations. They are more suitable for investors with advanced analytical and predicting skills.

Moreover, institutional investors use derivatives to hedge against risky market positions, whether for themselves or their wealthy clients. These trades may amount to hundreds of thousands of dollars.

Therefore, you are more likely to see the following four types of derivatives traders.


Risk-averse investors and those who want to protect themselves from exposure risk are more likely to use derivatives to avoid unpredictable market movements or unplanned events. 

Hedgers usually use call-and-put options to execute their right to trade at a favourable price without being obligated to do so.


Arbitrage involves buying a security from one marketplace and selling it in another, exploiting tiny price deviations between different locations and markets.

Financial securities in the derivatives market stem their value from the conventional spot exchange. However, since these are distinct markets and systems, price lag may happen, and many traders use these imperfections to make considerable earnings.


Speculators represent a large share of the traders’ pool. They use their analytical skills to predict the future price movements of a particular asset and invest in the hope of profiting if the prediction is correct.

It might look similar to gambling, where users bet on the asset price and gain if their expectations come true. However, financial speculators utilise their market knowledge and intuition to make reasonable conclusions about price actions.

Seasoned Traders

Professional traders use derivatives to diversify their investment portfolio and avoid significant risk exposure. Additionally, seasoned investors use leverage in trading derivatives to open a margin trading account and execute considerable market positions at lower trading fees.

Margin trading in derivatives is common. However, it is a risky trading strategy because it entails borrowing from and maintaining a percentage of the equity to keep the position. Otherwise, the broker may liquidate the account.

Trading Derivatives vs Spot

Derivatives provide more flexibility than standard instruments, giving control and protection from natural market risks and unpredictability.

derivatives trading vs spot trading

Spot trading entails the transfer of the underlying asset, providing traders with actual ownership over the purchased security. This approach prevailed in financial markets for years as investors were trading stocks and bonds.

On the other hand, derivatives do not involve ownership transfer between the buyers and sellers because participants are entitled to the contract value they trade. The contract derives its value from the underlying assets, dictating a real-time market price.

Trading in the spot market is usually done through standard financial markets offered through intermediaries and brokerage platforms. 

However, derivatives are more diverse, giving traders the right to decline their right to buy/sell the underlying asset and bet on future price movements in futures, forwards, swaps and options contracts.

Nevertheless, derivatives are used to mitigate substantial risks, allowing traders to hedge against trading positions and avoid heavy losses. 

Advantages and Disadvantages of Derivatives Trading

Succeeding in the derivatives market requires a thorough understanding of each contract type and advanced market analysis skills. 

Since most of these instruments involve trading on the security’s future price, it is essential to have elite predictability and intuition, making it difficult for the average day trader. Let’s review some strengths and weaknesses of derivatives in trading.


  • Risk management during market uncertainty and when trading volatile securities.

  • The ability to lock in prices and only execute the trade when conditions are favourable.

  • Transferring risks to other market participants with swaps where investors can exchange interest rates or debts.

  • Not being obliged to execute the trade when markets move unexpectedly with options contracts.

  • The ability to use leverage to explore amplified market positions financed by the broker.


  • Liquidity shifts can cause delays in executing call options.

  • The speculative nature makes the market an unreliable source of income.

  • Counterparty risk if the other side of the trade defaults and becomes unable to deliver the contracted security.

  • The low regulation of private derivatives exchanges exposes traders to risks compared to traditional markets where regulators provide financial insurance.

Becoming a Derivatives Broker

Brokerage firms are increasingly oriented towards traders’ needs, offering diverse ways to invest and make money in the financial markets. Therefore, offering derivatives contracts is the best way to cater to those growing trends.

During market unpredictability, investors prefer option contracts to minimise any potential risk when volatility increases. Moreover, when you offer derivatives trading, you are more likely to attract institutional investors who want to hedge against significant market positions, giving you the opportunity to hit big gains as you charge service fees.

You can also attract more retail traders and speculators by integrating advanced derivatives trading strategies into your trading system, such as algorithmic and managed PAMM accounts, which save the user much of the research time.

Sourcing Derivatives Liquidity

The biggest challenge for derivatives brokers is acquiring liquidity. This is especially critical during market volatility when sellers struggle to deliver the derivatives asset, causing price slippage and increasing costs.

Therefore, find reliable derivatives liquidity providers who can provide deep market across various asset classes and instruments.

Derivatives market liquidity

Depending on your business size, you can opt for a prime broker who connects you with tier-1 banks and offers advanced financial services or prime-of-prime LPs that facilitate trading and liquidity at affordable rates.

Derivatives Brokerage Trends in 2024

Derivative contracts have been thriving massively over the last few years, and this growth is expected to continue for the foreseeable future.

The future of derivatives trading

The derivatives market size is expected to exceed $59 billion by 2023 after reaching just under $22 billion in 2020. The research also estimates the market’s compound annual growth rate of around 8%, giving brokers a promising horizon.

The Futures Industry Association expects that 42% of traders believe this growth will be caused by high volatility. The rise of the crypto derivatives market can play a significant role in this growth, especially with the increasing adoption rate across centralised and traditional financial institutions.

Regulatory Changes in The Horizon

Much of these trends and anticipations are driven by upcoming reforms this year, such as the following.

  • The new EMIR 3 regulations aim to improve how clearing houses work between EU and UK markets to mitigate risks.

  • Amendments to the prospectus and retail disclosures are expected to boost transparency and investor confidence.

  • Standardised crypto and digital asset regulations across financial institutions and banking systems to avoid financial failures.

  • The upcoming reforms are expected to increase the volume and diversity of environmental, social and governance derivatives.

3 Trend Drivers

The Business Research Insights report also highlights three factors that spur the potential of derivatives trading:

  • The growing demand for swap derivative contracts.

  • The increasing need for higher efficiency and regulatory reforms.

  • The developing utilities of artificial intelligence and automation.

Most of these amendments and changes are planned to be implemented in 2024, improving how derivatives trading works and encouraging more investors and businesses to enter this market.


Derivatives trading has been around for a while. However, the last couple of years has witnessed massive reforms and introductions expected to boost the market to new highs.

Traders, whether new or seasoned investors, increasingly favour the risk-averse approach of derivatives contracts. Businesses and brokerage firms can profit from this growing tendency by offering futures, forwards, options, and swaps on OTC exchanges on a broad combination of securities.

Once you get over the challenge of integrating a liquidity provider to facilitate trading with derivatives contracts, you can expand your range of services and appeal to a new online trading community and market. 


Is trading derivatives profitable in 2024?

Yes. Financial regulations are upcoming this year to make the market more transparent and lure more investors into this space, especially with the adoption of digital assets and crypto trading.

How risky is derivative trading?

Derivative contracts are risk-management tools that allow you to bet on the security’s future price and only execute if the trade is profitable on the predetermined contract expiration date. 

Who invests in derivatives?

Speculators, hedgers and financial institutions use derivatives trading to mitigate significant risks and avoid volatility damages. Most successful investors use derivatives to amplify their gains. Warren Buffett famously said: “Derivatives are financial weapons of mass destruction.”

Should I invest in derivatives or stocks?

Derivatives are safer than the stock market. Owning stocks might entitle you to dividends. However, derivatives are less risky because you can choose to execute or not and use leverage to multiply your potential gains.

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