Derivatives are financial instruments whose value changes in response to movements in price of the underlying instrument. The main types of derivatives are futures, forwards, options, swaps and contracts for difference (CFDs)..

Options can be lumped in with other derivatives such as futures, warrants and contracts for difference (CFDs). A derivative simply means that the price is “derived” from some underlying instrument, either a share, for example Rio Tinto, a commodity such as gold, or a financial instrument like the 90-day bank bill.

Derivatives, such as options, are traded on margin, which means that you don’t have to fork out the entire cost of the investment upfront, but instead utilise borrowings to boost your exposure. This means that possible profits and losses are much heftier trading derivatives than many other investments, such as direct shares.