what is an equity derivative 
an equity derivative is a financial instrument whose value is based on the equity movements of the underlying asset for example a stock option is an equity derivative because its value is based on the price movements of the underlying stock investors can use equity derivatives to hedge the risk associated with taking long or short positions in stocks or they can use them to speculate on the price movements of the underlying asset understanding equity derivativesequity derivatives can act like an insurance policy the investor receives a potential payout by paying the cost of the derivative contract which is referred to as a premium in the options market an investor that purchases a stock can protect against a loss in share value by purchasing a put option on the other hand an investor that has shorted shares can hedge against an upward move in the share price by purchasing a call option equity derivatives can also be used for speculation purposes for example a trader can buy equity options instead of actual stock to generate profits from the underlying asset s price movements there are two benefits to such a strategy first traders can cut down on costs by purchasing options which are cheaper rather than the actual stock second traders can also hedge risks by placing put and call options on the stock s price other equity derivatives include stock index futures equity index swaps and convertible bonds using equity optionsequity options are derived from a single equity security investors and traders can use equity options to take a long or short position in a stock without actually buying or shorting the stock this is advantageous because taking a position with options allows the investor trader more leverage in that the amount of capital needed is much less than a similar outright long or short position on margin investors traders can therefore profit more from a price movement in the underlying stock for example buying 100 shares of a 10 stock costs 1 000 buying a call option with a 10 strike price may only cost 0 50 or 50 since one option controls 100 shares 0 50 x 100 shares if the shares move up to 11 the option is worth at least 1 and the options trader doubles their money the stock trader makes 100 position is now worth 1 100 which is a 10 gain on the 1 000 they paid comparatively the options trader makes a better percentage return if the underlying stock moves in the wrong direction and the options are out of the money at the time of their expiration they become worthless and the trader loses the premium they paid for the option another popular equity options technique is trading option spreads traders take combinations of long and short option positions with different strike prices and expiration dates for the purpose of extracting profit from the option premiums with minimal risk equity index futuresa futures contract is similar to an option in that its value is derived from an underlying security or in the case of an index futures contract a group of securities that make up an index for example the s p 500 the dow index and the nasdaq index all have futures contracts available that are priced based on the value of the indexes however the values of the indexes are derived from the aggregate values of all the underlying stocks in the index therefore index futures ultimately derive their value from equities hence their name equity index futures these futures contracts are liquid and versatile financial tools they can be used for everything from intraday trading to hedging risk for large diversified portfolios while futures and options are both derivatives they function in different ways options give the buyer the right but not the obligation to buy or sell the underlying at the strike price futures are an obligation for both the buyer and seller therefore the risk is not capped in futures like it is when buying an option investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal 