If I were to consider all derivatives in the world and point out the most dangerous one, I would undoubtedly say it is the contracts in the cryptocurrency space. To what extent is it dangerous? I am already very adept at leveraged trading, to the extent that going back to stocks feels more difficult. Yet, even I would never touch the contracts in the cryptocurrency space because their leverage exceeds the bounds of orderly and reasonable ranges.
Once leverage shakes hands with chaotic volatility, the trading floor will turn into a complete casino.
There is no educational requirement at the entrance of the casino. Gambling instincts are the spear of human nature, easily piercing through the cloak of higher education. Graduate students and PhD candidates from prestigious universities, such as those from 985 and 211 institutions, lack the ability to assess risk, let alone manage it. Unfortunately, the overlap between KOLs in this space and idols from the 85-00 generation, such as Jay Chou and Li Xiaolai, does not set a good example for young people; instead, they attract many fans to enter the doors of the casino.
For those who are not from a financial background and want to engage well with derivatives, it is essential to first understand trade/market. At this stage, you can look at the Dow Jones index, which is a standardized, highly liquid index that can help you understand what trading means. There are many interpretations of it, and you can find entry points for observation based on your industry and work. Alternatively, you can choose the S&P 500, S&P 100, or Russell 1000. The purpose of this step is to understand unleveraged trading.
The second step is to understand leveraged forward trading, which can be observed through crude oil. This adds a time pricing concept to the first step. In other respects, it remains the same, because there are many influencing factors. Since 2024, the weight of industry supply and demand affecting its price has decreased, while the financial and macro attributes have increased, making it easier for outsiders to observe and think.
The third step is to understand options trading. You can look at the options for Tesla, Meta, and Nvidia. Here, we should not focus on the index options from the first step, but rather switch to US stocks and commodities, or ETF options within ETP options. This step is very difficult, primarily due to cognitive biases. Many people believe that options are only for high-IQ individuals or are simply an elusive lottery. The investor education in Chinese is poorly done, you could say it is very lacking. Most people even misunderstand futures, let alone options. In fact, options are the best risk management tool; they are particularly elegant and embody the principles of old money and old school. Of course, the prerequisite is that you must know how to use them.
