Derivatives and commodities terms, defined
Futures, options, the Greeks, margins and the commodity and currency segment. 23 terms with full definitions.
A right, an obligation, and the price of time
Two instruments generate almost this entire vocabulary. A future is an obligation to transact at a set price on a set date; a option is a right without the obligation. That single difference produces everything else: because an option holder can walk away, the option must be paid for, and the price of that right depends on time and volatility as much as on direction.
The Greeks — delta, gamma, theta, vega, rho — measure how that price responds to each variable separately. They are the reason a directionally correct option position can still lose money: theta removes value every day regardless of direction, and a fall in implied volatility can outweigh a favourable move in the underlying.
The margin group — SPAN, exposure, mark to market, margin call — describes the money the exchange requires while a position is open. Leverage is why derivatives are attractive and why the regulator has published repeated data showing most individual traders in this segment lose money.
23 derivatives and commodities terms, A to Z
Definitions are unabridged. Worked examples for every term live in the interactive glossary.
Arbitrage
Arbitrage is exploiting price differences of the same asset across markets simultaneously to lock in risk-free profit. Modern algorithmic trading has reduced arbitrage opportunities to milliseconds. Cash-futures arbitrage is common in India.
Carry Trade
A carry trade borrows in a low interest rate currency and invests in a high interest rate currency, pocketing the interest rate differential. Profitable when exchange rates are stable. ‘Unwind’ of carry trades (rapid currency reversal) causes sharp emerging market currency crashes.
Contango vs Backwardation
Contango: futures price > spot price (normal). Happens when storage/carrying costs exist. Backwardation: futures price < spot price. Happens when near-term demand is tight (oil supply squeeze). Backwardation benefits commodity futures holders (positive roll yield).
Covered Call
A Covered Call is one of the most conservative options strategies, used by investors who hold a stock (or index position) and want to generate additional income by selling a call option against that holding. “Covered” refers to the fact that if the call is exercised, the stock already held can be delivered — no additional purchase is necessary. The strategy: Hold 100 shares of Infosys at ₹1,500 (or 1 lot in F&O) + Sell 1 Call at strike ₹1,600 for ₹30 premium. Outcomes: If Infosys stays below ₹1,600 at expiry — call expires worthless, seller keeps ₹30 premium as income (2% monthly return on the stock value). The stock position is unchanged. If Infosys rises above ₹1,600 — call is exercised, stock is sold at ₹1,600 regardless of market price. Profit = (₹1,600 – ₹1,500 stock cost + ₹30 premium) = ₹130/share. But if Infosys rallies to ₹1,800, the covered call seller misses ₹200 of upside (capped at ₹130). This is the trade-off: defined income in exchange for capped upside. Covered calls are particularly popular in sideways or gently trending bull markets — when investors want income from their stock holdings but believe significant near-term upside is limited. In India’s F&O market, portfolio managers who hold large stock positions sell monthly covered calls systematically, targeting 1-2% monthly premium income.
Credit Default Swap (CDS)
A CDS is an insurance-like derivative where the protection buyer pays periodic premium to the seller who compensates if the reference entity (company/government) defaults on its debt. CDS spreads indicate market-perceived default probability.
Currency Depreciation vs Appreciation
Currency depreciation occurs when a currency loses value relative to other currencies — more units of the depreciating currency are needed to buy the same amount of foreign currency. Currency appreciation is the opposite — fewer units needed. Depreciation and appreciation in floating exchange rate regimes are driven by supply-demand dynamics: trade deficits (more imports than exports → more demand for foreign currency → domestic currency depreciates); interest rate differentials (higher Indian rates attract FPI inflows → rupee appreciates); inflation differentials (higher inflation → currency depreciates in PPP terms); and capital flows (FPI outflows during global risk-off events → rupee depreciates). The Rupee has depreciated against the USD over long periods: ₹15/USD in 1990 → ₹45 in 2007 → ₹68 post-demonetisation (2016) → ₹83+ by 2024. The long-term depreciation trend reflects India’s structurally higher inflation rate vs the US — consistent with Purchasing Power Parity (PPP) theory. However, shorter-term movements depend heavily on global risk appetite, US Federal Reserve policy, and India-specific factors (current account deficit, FPI flows, oil prices). Depreciation impact: exports become cheaper for foreign buyers (competitive advantage for IT, pharma, textiles exporters); imports become expensive (oil, gold, electronics); foreign-currency-denominated debt becomes costlier to service in rupee terms (risk for Indian corporates with ECB — External Commercial Borrowings); NRI remittances increase in rupee value (windfall for remittance recipients). For investors: USD-denominated assets (US stocks, dollar-denominated mutual funds) generate extra return in rupee terms during rupee depreciation — a natural hedge for Indian investors with international portfolio allocation.
Delta (Greeks)
Delta measures how much an option’s price changes for a ₹1 move in the underlying. Call deltas range 0 to 1; put deltas range −1 to 0. At-the-money options have ~0.5 delta. Delta also approximates the probability of expiring in-the-money.
Delta (Options Greek)
Delta is the most fundamental of the options Greeks, measuring the rate of change in an option’s premium with respect to a ₹1 (or $1) change in the underlying asset’s price. Call options have positive delta (0 to +1); put options have negative delta (-1 to 0). An ATM option has a delta of approximately ±0.5, meaning the option’s price changes by ₹0.50 for every ₹1 move in the underlying. Deep ITM options have delta near ±1.0 (behaves almost like the underlying); deep OTM options have delta near 0 (barely sensitive to small underlying moves). Delta serves as a probability proxy: an option’s delta approximately equals the probability of expiring in the money. A call with delta 0.30 has roughly 30% probability of expiring ITM; a call with delta 0.80 has 80% probability. This makes delta-selection a direct expression of the trader’s directional conviction and risk preference: buying high-delta (0.70+) options is expensive but high probability of profit if the underlying moves; buying low-delta (0.15-0.25) options is cheap but requires large underlying moves to profit. Delta hedging is the practice used by options market makers and sophisticated traders of maintaining a “delta-neutral” portfolio — buying or selling the underlying to offset the option’s delta, eliminating directional risk and isolating the exposure to Theta, Vega, or Gamma. Market makers who sell options typically delta hedge continuously, rebalancing as the underlying moves.
F&O (Futures and Options)
F&O are derivative contracts deriving value from an underlying asset (stocks, indices). Futures obligate both parties to transact at a preset price on a future date. Options give the buyer the right (not obligation) to buy/sell.
Forex (Foreign Exchange Market)
The Foreign Exchange (Forex or FX) market is the world’s largest and most liquid financial market — with daily trading volume exceeding $7.5 trillion (Bank for International Settlements, 2022 triennial survey) — dwarfing all stock exchanges combined. Forex facilitates the conversion of one currency into another for international trade, tourism, investment flows, and speculation. Unlike stock markets, Forex operates 24 hours a day, 5.5 days a week across overlapping time zones: Sydney, Tokyo, London, and New York sessions. Exchange rates are quoted as currency pairs: USD/INR 83.50 means 1 US Dollar = ₹83.50. The first currency (USD) is the base currency; the second (INR) is the quote currency. A “strengthening rupee” means fewer rupees per dollar (e.g., 82 vs 84). Major currency pairs: EUR/USD, USD/JPY, GBP/USD, USD/CHF — these have highest liquidity and tightest bid-ask spreads. Emerging market pairs (USD/INR, USD/BRL) have wider spreads and lower liquidity. India’s Forex market: RBI and SEBI regulate Forex in India. INR trading occurs on the OTC (Over-the-Counter) Interbank market and on NSE/BSE currency derivatives segments (USD-INR futures, EUR-INR futures). RBI actively intervenes in Forex markets to smooth INR volatility — buying dollars when rupee appreciates too fast (building reserves) and selling dollars when rupee depreciates sharply. India’s Forex reserves peaked at $645 billion in October 2021 and serve as a buffer against external shocks. The INR is not freely convertible (full Capital Account Convertibility) — current account is convertible (trade, remittances) but capital account flows are regulated.
Futures Contract
A futures contract is a standardised legal agreement to buy or sell a specific underlying asset (stock, index, commodity, currency) at a predetermined price (futures price) on a specified future date (expiry). Unlike options, futures impose an obligation on both parties — the buyer must purchase and the seller must deliver (or settle in cash) the underlying at the agreed price, regardless of where the market is at expiry. In India, all equity and index futures are cash-settled — no physical delivery occurs. Commodity futures (MCX — Multi Commodity Exchange) can involve physical delivery. Futures trading requires posting margin — a good-faith deposit representing a fraction of the contract’s total value. NSE uses SPAN (Standard Portfolio Analysis of Risk) margin for calculating initial margin requirements. The mark-to-market (MTM) mechanism credits or debits the variation margin daily based on price changes: if a position moves against the trader, the MTM loss is debited from their account the same day. This daily settlement distinguishes futures from forward contracts (which settle only at expiry). Key futures concepts: Basis = Futures Price – Spot Price. In normal (contango) conditions, futures trade at a premium to spot (due to cost of carry). Near expiry, basis converges to zero (futures price = spot price at expiry). Rollover: as a futures position’s expiry approaches, traders “roll” it forward by closing the near-month contract and opening the next month’s — maintaining their exposure. Monthly futures rollover data provides insight into institutional positioning.
Gamma
Gamma measures the rate of change of delta for each ₹1 move in the underlying. High gamma (near ATM, near expiry) means delta changes rapidly — creating large P&L swings. Sellers fear high gamma; buyers love it.
Implied Volatility (IV)
Implied Volatility (IV) is the market’s forward-looking expectation of future price variability of an underlying asset, derived from the current market price of an option. While historical volatility (HV) looks backward at actual price movements, IV is extracted from option prices and represents the market’s collective estimate of future volatility — it is “implied” by what traders are paying for options. IV and option price are directly related: higher IV = higher option premium (all else equal). A 1% increase in IV increases an ATM option’s premium by approximately the Vega. IV is not constant — it changes with market conditions. It spikes during uncertainty (ahead of major events like Union Budget, RBI policy, earnings, global crises) and compresses during quiet, trending markets. India VIX (CBOE’s model adapted for India) is NSE’s volatility index, measuring the 30-day expected volatility of Nifty, derived from Nifty options prices. India VIX above 25 indicates high fear; below 14 indicates low volatility/complacency. The VIX and Nifty typically move inversely — markets falling causes VIX to spike. IV Rank (IVR) and IV Percentile (IVP) help contextualise current IV: IVR = (Current IV – 52-week low IV) / (52-week high IV – 52-week low IV) × 100. An IVR above 50 means IV is in the upper half of its annual range — potentially rich (good for selling options). Below 20 means IV is low — options are cheap, potentially better for buying.
India VIX
India VIX (Volatility Index) is NSE’s measure of the market’s expectation of near-term volatility in the Nifty50 index, computed from Nifty Options prices using the CBOE VIX methodology adapted for Indian markets. It represents the expected annualised volatility over the next 30 calendar days, expressed as a percentage. A India VIX reading of 15 means the market expects Nifty to move approximately ±15% annualised — or about ±1.3% per week on average. VIX is sometimes called the “fear gauge” — it spikes during periods of market uncertainty and stress. India VIX and Nifty are typically inversely correlated: market declines cause VIX to spike (fear increases), while bull markets see VIX compress (complacency). Historical ranges: India VIX below 12 indicates very low volatility (often preceding large moves); 12-20 is normal market range; 20-30 indicates elevated uncertainty; above 35 represents extreme fear (March 2020 COVID crash saw India VIX reach 86 — an all-time high). For options traders, India VIX is the primary context for volatility strategies. High VIX makes options expensive — better for sellers. Low VIX makes options cheap — better for buyers. “Selling the VIX spike” (selling options when VIX is elevated, expecting reversion) is a common strategy. VIX also informs position sizing — during high VIX periods, moves are larger and faster, requiring wider stops and smaller position sizes for risk management.
Iron Condor
The Iron Condor is a non-directional options strategy designed to profit from low volatility — specifically, from the underlying asset remaining within a defined price range until expiry. It is constructed by simultaneously: (1) Selling an OTM Call and buying a further OTM Call (a bear call spread), and (2) Selling an OTM Put and buying a further OTM Put (a bull put spread). The net result is a position that profits from Theta decay when the underlying stays between the two short strikes, with defined maximum loss and defined maximum profit. Maximum profit = Net Premium Received (from selling the two short options minus cost of two long options as protection). Maximum loss = Width of one spread minus net premium received. For example: Sell 22,500 Call/Buy 22,700 Call (bear call spread, collect ₹50); Sell 21,500 Put/Buy 21,300 Put (bull put spread, collect ₹50). Net premium: ₹100. Spread width: ₹200. Max profit: ₹100 (if Nifty stays between 21,500 and 22,500). Max loss: ₹200 – ₹100 = ₹100 (if Nifty moves beyond either outer strike). Breakevens: 21,400 and 22,600. Iron Condors are most effective in low-volatility, sideways-trending markets (low India VIX). They fail when the underlying makes a decisive move in either direction. Risk management: most professionals adjust one leg when the underlying approaches a short strike, rolling the threatened side further OTM.
MCX (Multi Commodity Exchange)
MCX is India’s largest commodity futures exchange, regulated by SEBI. It provides trading in metals (gold, silver, copper), energy (crude oil, natural gas), and agri-commodities. Gold and silver are most liquid; crude is the most volatile.
NCDEX (National Commodity and Derivatives Exchange)
NCDEX is India’s leading agricultural commodity exchange, regulated by SEBI, focusing on agri-commodities: soybean, chana, mustard, cotton, wheat, sugar. It allows farmers and traders to hedge price risk. Physical delivery is available for most contracts.
Options Contract
An options contract is a derivative instrument that gives the buyer the right — but not the obligation — to buy (Call option) or sell (Put option) an underlying asset at a predetermined price (the Strike Price) on or before a specified date (Expiry Date). The buyer pays a premium upfront for this right; the seller (writer) receives the premium and takes on the corresponding obligation. Options are fundamentally different from futures: the buyer’s loss is capped at the premium paid, while the potential gain can be many times the premium — creating an asymmetric payoff profile. In India, the NSE (National Stock Exchange) is one of the world’s most active options markets. Nifty50 and BankNifty weekly options expiring every Thursday dominate trading volumes, with average daily turnover exceeding ₹60,000-80,000 crore (notional). Stock options exist on approximately 200 individual companies. Options are settled in cash (no physical delivery for index options; delivery possible for stock options held to expiry). SEBI’s peak margin regulations (fully implemented from September 2021) require upfront collection of full SPAN + exposure margin for option sellers, increasing capital requirements significantly. Understanding basic terminology: ITM (In The Money) — for a Call, when the underlying price is above the strike; for a Put, when the underlying is below the strike. ATM (At The Money) — strike equals the current market price. OTM (Out of The Money) — a Call where underlying is below strike; a Put where underlying is above strike. OTM options have no intrinsic value — only time value.
Options Greeks
Options Greeks are mathematical measures of how an option’s price (premium) responds to changes in various market parameters. The four primary Greeks — Delta, Gamma, Theta, and Vega — provide option traders with a quantitative framework for understanding and managing the risks of options positions. Together, they describe the sensitivity of an option’s value to each of the key variables: underlying price (Delta, Gamma), time decay (Theta), and implied volatility (Vega). A fifth Greek, Rho, measures sensitivity to interest rate changes (less significant for short-dated options). Delta measures the change in option price for a 1-point change in the underlying. An ATM call has a delta of approximately 0.5 (moves ₹0.50 for every ₹1 move in underlying). Deep ITM calls have delta approaching 1.0; deep OTM calls have delta near 0. Delta also approximates the probability of the option expiring ITM. Gamma measures the rate of change of delta — ATM options have the highest gamma, causing rapid delta changes as the underlying moves near the strike. Theta measures daily time decay — the amount an option loses in value per day, assuming all else equal. ATM options have the highest absolute theta; theta decay accelerates as expiry approaches (non-linear). Vega measures sensitivity to a 1% change in implied volatility — options with longer expiry have higher Vega.
Spot Price vs Futures Price
Spot price is the current market price for immediate delivery of a commodity. Futures price is the agreed price for delivery at a future date. The difference (basis) reflects storage costs, insurance, financing, and convenience yield.
Straddle
A straddle is an options strategy that profits from significant movement in either direction — the trader is agnostic about direction but expects large magnitude of movement. It is constructed by buying (long straddle) or selling (short straddle) equal quantities of ATM Call and ATM Put with the same strike and expiry. Long straddle: pays combined premium, profits if underlying moves more than the total premium in either direction. Short straddle: receives combined premium, profits if underlying doesn’t move significantly. Long straddle breakevens: above (Strike + Total Premium) and below (Strike – Total Premium). If the Nifty 22,000 straddle costs ₹300 total (₹150 Call + ₹150 Put), breakevens are 21,700 and 22,300. Nifty must move more than 300 points in either direction for the long straddle to profit at expiry. Short straddle breakevens are identical — the seller profits if Nifty stays within ±300 points. Long straddles are popular ahead of high-impact events (budget, election results, RBI policy, major earnings) where traders expect large moves but are uncertain about direction. The critical risk: if the event produces a muted market reaction (IV crush), the long straddle loses as both options’ IV collapses. Short straddles are naked options positions with theoretically unlimited loss — they require significant margin and disciplined risk management. The Strangle is a cheaper variant: buying OTM Call and OTM Put instead of ATM — lower cost but requires larger move to profit.
Theta (Time Decay)
Theta measures the rate at which an option’s value declines due to the passage of time, assuming all other factors (underlying price, volatility) remain constant. Theta is expressed as the daily loss in option premium: a Theta of -20 means the option loses ₹20 in value every calendar day. For option buyers, Theta is the enemy — they pay for time and lose value daily if the underlying doesn’t move. For option sellers (writers), Theta is the friend — they receive premium and profit from its decay as time passes. Theta decay is non-linear: it accelerates dramatically in the final days before expiry. An option with 30 days to expiry loses roughly 1/30 of remaining time value per day; with 7 days to expiry, the same option loses proportionally much more per day, as the remaining time value must decay to zero in 7 days. This creates the well-known “Theta acceleration” in the final week, which is why options sellers often focus on near-expiry (weekly) options to harvest maximum time decay. India’s weekly Nifty options (Thursday expiry) have become the favourite venue for options sellers precisely because Theta is at its highest in short-dated options. The “sweet spot” for sellers: ATM options have the highest absolute Theta; OTM options have lower absolute Theta but higher relative Theta (as a percentage of their value). Most systematic options-selling strategies target options in the 20-40 delta range — enough premium to collect meaningful income while retaining probability advantage.
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