Most people know about stock market and lesser people know about derivative market. They become confused when they are told that you can buy an index or you can short the market. From a point of view, derivatives trading is lot more easier because you don’t have thousands of stocks to be reviewed, analyzed and monitored.
Here are some of the advantages of equity derivatives:
a. Provide a mechanism for hedging as well as reallocating risk to those more tolerant of it
b. Serve as a pricing benchmark as well as a price discovery tool
c. Provide information about future stock index movements
d. Portfolio management for stock market participants:
i. to hedge and cross hedge against price risk
ii. to arbitrage when the opportunity arises
iii. to speculate for profits
iv. to earn additional income during quiet market conditions, particularly in options market
v. to allocate assets without having to sell the underlying
Reasons to Trade Equity Derivatives:
1. Traded on the highly cost-effective and efficient electronic trading platform, in a transparent and liquid derivatives market
2. Excellent hedging instrument for institutional users that hold a large portfolio of stocks.
3. Take advantage of the leverage factor by holding much larger position with a small amount of funds
4. Profit from various combination strategies with stock portfolio, derivatives and options.
(Source: Understanding Equity Derivatives)