Understanding derivatives – The complete overview of options, futures, and CFDs

What would be possible if you could control market movements five or ten times larger with a small security deposit of €500? That is the core idea of derivatives. But caution: the same instrument that multiplies gains can also accelerate losses. Read how these financial tools really work – and which rules you should master.

The core: What makes a derivative?

Derivatives are intangible. They do not own the underlying asset (the underlying asset) itself, but a contract about its future price development. A farmer wanting to hedge his wheat harvest does not buy physical wheat – he makes a bet on the upcoming price. An airline wanting to protect against fuel price increases does the same.

The special thing: A derivative depends entirely on the price of another asset – hence the name (from Latin “derivare” = to derive). The value does not arise from the product itself, but from the expectation of how this price will develop.

The key features at a glance

Where do derivatives appear in real life?

Practical applications are more diverse than many think:

• Food producers hedge raw material prices (sugar, cocoa butter) months in advance
• Export companies neutralize currency risks through forward contracts
• Pension funds hedge their pension securities against exchange rate failures
• Speculators and day traders use CFDs and options to target specific price movements
• Private investors encounter derivatives indirectly via structured products, certificates, or bonus bonds

The same instrument – for example, a future – serves completely different purposes. The farmer protects his yield. The investor tries to make profits.

The three strategic applications

1. Hedging – protection through coverage

A portfolio full of tech stocks, but the next reporting season could be weak? Instead of panicking and selling, buy a put option on the Nasdaq. If the index falls, your puts rise – your losses are offset. This strategy costs (the premium), but offers security.

2. Speculation – betting on price movements

This is the aggressive opposite. You expect rising prices and buy a call option. If your forecast is correct, you can make hundreds of percent profit – or lose everything if the market moves differently. Here, risk is consciously taken, not avoided.

3. Arbitrage – exploiting price differences

This is the domain of professional traders. You find the same security in two different places at different prices and profit from the difference. For private investors, this is usually not accessible.

The tools: What types of derivatives are there?

Options – the choice right

An option gives you the right to buy or sell a underlying asset at a predetermined price – but you are not obliged.

Think of reserving a bike: you pay a small fee to secure it. If the price later rises, you benefit. If not, you let it expire.

• Call option: right to buy
• Put option: right to sell

Practical example: You own stocks at €50. You buy a put option with a strike of €50 and a 6-month term. If the stock crashes, you can still sell it for €50 – your loss is capped. If the stock rises, the option expires worthless, but you enjoy the gains.

Futures – the binding agreement

Futures are the opposite of options: binding for both sides. Buyers and sellers agree today to trade a certain amount of an asset (e.g., 100 barrels of oil, 1 ton of wheat) at a fixed price on a specific future date.

Unlike options, there is no exit right – the contract must be fulfilled, either through physical delivery or cash settlement. Therefore, exchanges require a margin (security deposit).

Professionals love futures for their leverage and low fees. But beware: theoretically unlimited losses are possible – if the market moves strongly against your position.

CFDs – the popular tool for private investors

CFDs (Contracts for Difference) are bets between you and a broker on the price development of an underlying asset. You do not actually own the Apple stock, the barrel of oil, or the cryptocurrency – you only speculate on their price trend.

Going long (buy position): Market rises → profit. Market falls → loss.
Going short (sell position): Market falls → profit. Market rises → loss.

The special thing: leverage. With only 5% margin (security deposit), you control 100% of a position. A 1% price increase doubles your stake. A 1% decrease halves it. Volatility acts like an amplifier.

CFDs are available on thousands of assets: stocks, indices (DAX, NASDAQ), commodities, currency pairs, cryptocurrencies. Entry is easy, psychology is difficult.

Swaps – the exchange of payments

Two parties agree to exchange payments in the future. A company with variable interest rate wants to hedge against rising interest rates. It enters into an interest rate swap with a bank, trading uncertainty for predictability.

Swaps are not traded on the stock exchange but bilaterally between institutions (Over-the-counter). For private investors, they are mostly invisible – but they indirectly affect credit conditions and market dynamics.

Certificates – ready-made derivative packages

Banks combine several derivatives (options, swaps, sometimes bonds) into a product – a “ready meal” among derivatives. Index certificates mirror an index 1:1. Bonus certificates offer a buffer zone against price losses. Knock-out products are highly leveraged.

You do not need to construct these yourself, but you should understand how they work.

The key concepts in derivative trading

Leverage effect – the multiplier

With a leverage of 10:1, you control a position worth €10,000 with €1,000. If the market rises by 5%, you make €500 (50% on your stake). If the market falls by 5%, you lose €500 – half your capital.

Leverage is an amplifier: small movements → big effects. In the EU, maximum 1:30 leverage on forex is allowed, usually 1:5 on stocks CFDs, variable on commodities and indices.

Margin – the entry fee

The margin is the security deposit you must provide to trade with leverage. Want to trade an index CFD with 20x leverage? Maybe you only need €50 margin to control a position worth €1,000.

This margin acts like a buffer. If the value of your position drops, losses are initially offset. If it falls below a certain point, you get a margin call – you must add funds, or the position is automatically closed.

Bid-Ask spread – the trading market

The spread is the difference between buy and sell price. You buy oil at €85.50, but can only sell immediately at €85.45. This €0.05 difference is the broker’s or market maker’s profit. In large positions or volatile times, this gap can become significantly larger.

Long vs. Short – the basic direction

Long: You bet on rising prices. Buy cheap, sell expensive. That’s intuitive.

Short: You bet on falling prices. You sell first (borrow the asset from the broker), buy back later cheaper. This is counterintuitive but also riskier – theoretically, a price can rise infinitely while you are short.

Long positions limit maximum to 100% total loss (if the underlying falls to 0). Shorts have theoretically unlimited risk of loss.

Strengths and weaknesses – an honest overview

The advantages

1. Small investments, large reach
With €500 and 1:10 leverage, you control a €5,000 position. A 5% price increase yields €250 profit – 50% return on your stake.

2. Hedging in your portfolio
Hold tech stocks but fear a crash? Buy a put option. If the market falls, your puts rise – offsetting losses.

3. Easy market access
No complicated structures needed. Long, short, hedging – all via one platform in a few clicks.

4. Affordable entry
Accounts can be opened with just a few hundred euros. Fractionalization means: you don’t have to buy 100 barrels of oil at once.

5. Order functions
Stop-loss, take-profit, trailing stops – you can limit your risks from the start.

The disadvantages (and why they are often underestimated)

1. The statistical reality: 77% of retail investors lose
This is not scaremongering – it’s the official warning of financial regulators. Those who trade without a clear plan, without risk management, and driven by greed, statistically fail.

2. Tax complexity
In Germany, derivative losses are limited to €20,000 per year since 2021. You lose €30,000 and gain €40,000? You pay taxes on €20,000 profit, even though you have a net loss – a nasty trap.

3. Psychological trap
You see +300% on a trade. You hold because you want more. Then the market crashes, and after 10 minutes, -70% is reached. You sell panicked – exactly the wrong behavior. Greed and panic are the biggest enemies.

4. Leverage eats up quickly
With 1:20 leverage, only a 5% retracement is needed, and your entire stake is gone. €5,000 account, full position – a bad morning with DAX -2.5% = €2,500 loss. Happens faster than you think.

5. Additive costs
Spreads, overnight fees (swap fees), possible commissions – these smaller costs add up, especially with frequent trading.

Is derivatives trading right for you?

Honest self-assessment is more important than ambition. Answer these questions:

1. Can you sleep through volatility? If your position swings 20% in an hour, do you panic?

2. Do you really understand how leverage works? Can you calculate what your position looks like with a -5% price loss?

3. Do you have a plan – or do you trade emotionally? Successful traders plan entry, target, and stop beforehand.

4. Can you withstand losses of several hundred euros? Not: financial ruin, but: would it annoy you, but not destroy you?

5. Can you trade actively or are you more long-term oriented? Derivatives are tools for active strategies, not for years of passivity.

If you answer more than two questions with “No,” do not start with real money. First, learn in a free demo account, without financial consequences.

The step-by-step plan

A derivative trade without a plan is gambling. Ask yourself before each trade:

1. Entry criterion: What exactly triggers my buy? A chart signal? News? An expectation?
2. Price target (Take-Profit): At what profit do I sell?
3. Stop-loss: At what loss do I pull the plug – absolutely?
4. Position size: How much % of my account do I risk? (Rule of thumb: max 2-5% per trade)
5. Time frame: Am I day trader, swing trader, or more medium-term oriented?

Write down these points or enter stop orders into the system. This discipline separates pros from amateurs.

Common beginner mistakes – and how to avoid them

Frequently asked questions

Is derivatives trading gambling or strategy?
Both are possible. Without a plan, it quickly becomes gambling. Those who trade with a clear strategy, real knowledge, and discipline use a powerful financial tool. The limit is not in the product but in the trader’s behavior.

How much starting capital should one have?
Theoretically, a few hundred euros suffice. Practically, you should plan for €2,000–5,000 to trade meaningfully (with appropriate position size). Key: only use money you can afford to lose.

Are there safe derivatives?
No. Every derivative carries risk. Capital protection certificates or defensively constructed options are considered relatively “safer,” but also offer meager returns. 100% safety does not exist – even “guaranteed” products can fail if the issuer goes bankrupt.

How is it taxed in Germany?
Gains from derivatives are subject to the flat tax (25% + solidarity surcharge + church tax, if applicable). The bank usually deducts the tax automatically. With foreign brokers, you must prove this yourself in the tax return. Crypto derivatives also count – they are not tax-free after one year.

What’s the difference: options vs. futures?
Options give a right (you do not have to exercise). Futures create an obligation (you must execute). Options cost a premium and can expire worthless. Futures are always settled. Options are more flexible, futures are more direct and binding.

Can you really make 77% profit with derivatives?
Theoretically yes – through leverage and timing. But statistically, 77% of retail investors lose money. It shows: profits are possible but unlikely without experience and discipline.

Conclusion: Derivatives are tools, not miracle weapons

A derivative is neutral – not a malicious financial instrument, not guaranteed wealth. It is a tool. In the hands of a professional with a plan, knowledge, and discipline, it can hedge portfolios or generate targeted profits. In the hands of an emotional beginner, it can quickly turn into an expensive lesson.

The key point: First, learn the theory. Then practice in a risk-free demo account, without real money. Only when you truly understand how leverage, margin, long/short, and stop-loss work – and have a clear plan – should you venture into the real market.

Derivatives are not suitable for everyone. They are for those willing to invest time to understand how they work – and who have the psychological discipline to follow their strategies, even when the market becomes emotional.