Earlier a derivative trader may have been found at the stock floor, making estimations and shouting them out. Today, a derivative trader is most likely to be found in front of a computer making his estimates and tinkering with code to make faster and better calls.
A day at the office would most likely start by the derivatives trader looking at all the data feeds available to him. He would adjust them to provide him with data on latest developments in his area of interest. Next he would check if his connections to the exchanges he is connected to are live. He would then estimate his hedge limits and put them down in the order book before the market opens in the morning. All this is not unlike a runner prepping himself, checking his gear and tracks before he shoots off the blocks.
A derivative trader does not need to know the intricate details of say pricing as a pricing model software is always available for that need. A derivative trader needs to have quick reflexes, assertive, comfortable with mathematics and someone who can optimize on the ratio of risk taking and rewards.
A derivatives trader could work for a small firm or a large retail investor. In a small firm a trader would need to be a risk manager as well. This is particularly true of more complex instruments. A larger firm would have a team of risk managers who would look at the trader’s hedge limits and positions and comment if they were advisable or not, in keeping with the company’s risk strategy.
One often hears of derivative traders being chained to the desk-forget a family life and so on. This is not always true. The work itself is within regular working hours with some extra time for preparation and free weekends. However, after hours partying or socializing with teams can eat into your time. This varies from country to country as well, with each country having its own financial culture.
Almost all derivative traders have access to the same feeds and similar software for pricing options. Algorithms or algos can trade way faster than a person and they do so based on how they have been programmed. The trader needs to know how to hedge exposure, and at what level to choose when making a block trade.
Derivative traders who are market makers need to continually make live quotes in a pre-specified range of options, over a range of strikes and expirations. In return for providing this liquidity they can receive a rebate from the exchange.
A derivative trader takes into account several factor while arriving at the bid-price he is ready to pay for an option and ask price, the price he is willing to sell at; they include underlying instrument’s price, the strike (exercise level), contract duration, prevailing market interest rates, stock borrowing rates, dividend expectations and volatility. How good a derivative trader is can be assessed by how well he is able to measure volatility. Naturally all traders look for good spreads, but a very wide spread could mean you would not be in the list of probable picks. A derivative trader needs to optimize his ratios at various strike levels to ensure good optionality for different levels of purchase and sales.
Derivative traders also look for relative value trades between components in the same index or in the same business sector. They do this to look at historical patterns. They will look for things such as patterns and levels of spreads, and volatility smile. They will analyze if they’ve been fast enough to identify any anomalies, and if this is the right time to trade. They will also employ volatility arbitrage strategies.
Expiration moments are typically tense for derivative traders. This is because in a very short period of time say five minutes the delta exposure on each option has to be hedged. This period is considered the auction time with participants in it determining the closing price.
The impact of news from within the company or economy can affect the position the trader has taken and give him very little time to correct it in tune with the new information. Sometimes the trader can have very little time to make these corrections, the information coming as it does before market opening or after market closing. Currently the market for exotic derivatives is on the downslide and that of plain vanilla options is high
A derivative trader is a person who manages volatility, provides liquidity and is in the thick of the financial world and enjoys handling and managing data. After being a trader for some time traders can opt to start their own firms.