How to Become a Derivatives Trader?

I received a question from one of the users asking me about how he can build a career as a derivatives trader on Wall Street. In this post I will explain the role of a derivatives trader and what you can do to become one.

So, what does a derivatives trade do? As the name suggests a derivatives trader trades in derivatives to make money. Similar to a cash trader, derivatives traders also work with both sell-side and buy-side firms. For example, at a buy-side firm such as a hedge fund, the derivatives trader will execute buy/sell orders for the fund managers. In a sell-side firm, such as a brokerage firm, they will execute customers orders.

Derivatives trading, however is more complex than vanilla cash trading. While a cash trader follows the market, and takes a directional view on the stock, bond or the stock index, a derivatives trader needs to follow a lot more in addition to this. For example, a derivatives trader keep track of factors such as richness of implied volatility of the stock, skewness, correlation/dispersion of an index, volatility surface, and so on.

The major derivatives traded include futures, options, and swap contracts. The traders will form various strategies using these derivatives to make profits. Derivatives traders are mathematically-oriented, and generally have an undergraduate degree, and often an MBA. The job of a derivatives trader requires you to be able to work in a fast-paced environment and be able to withstand high stress.

Here are a few tips that you can follow to secure a place as a successful derivatives trader.

Hone your Math Skills

A derivatives trader is expected to have strong math and statistics skills and the ability to visualize key metrics. Strong quantitative skills also help as derivative traders fight the algorithms every day.

While it's not necessary to get a master's degree in maths to get a job as a derivatives trader, it can tremendously help you in getting started. Most people aspiring for a career as a derivatives trader have a degree involving maths, statistics, or finance. Also, if you analyze the backgrounds of traders in top investment banks, you will notice a common thread - a degree and outstanding grades from a top notch institute.

Learn a Programming Language

Derivative traders in advanced positions often have to build/validate their own financial models and build complex trading strategies. This makes it important for them to be able to know a programming language such as C++ or VBA. You can learn these on your own or go for professional training. Most master's degrees in finance will include programming as an essential part of their curriculum. Note that programming skills are not required for all derivatives trading positions. For example, if you are just executing orders on behalf of customers, then this is not needed. However, if you do proprietary trading for your employer, then this may be an essential skill.

Get Real Derivatives Trading Experience

Whether you are still studying, or already working in some other role, you need to start building your derivatives trading knowledge by getting the real trading experience. While studying, you can take up a summer internship at an investment bank. Internship can really help you grasp the fundamentals of the real-life derivatives trading world. You will learn how trading is done, the lifestyle of traders, and whether you are really cut out for it. If you are already working, then you can either join a professional training program to learn derivatives trading or start trading in your personal account.

Typical Job Profile

The following is a typical job profile (source: of a senior derivatives trader at an investments firm:

  • Execution of Derivative trades in various product markets according to specific   Derivative Program guidelines (Rates, Credit, FX, and Equity), but with an emphasis on equity derivative trades.
  • Focus on economic and efficient derivative trade execution and maintaining program compliance.
  • Build up strong expertise in Capital Markets dynamics, financial derivative Instruments, their valuation and trade execution aspects.
  • Identify optimal income and/or risk reducing trading strategies
  • Active management of counterparty exposures, counterparty performance and relationships.
  • Monitoring of collateral and liquidity aspects for margining purposes – look for optimizations.
  • Develop a deep understanding of the hedging and funding dynamics of counterparties and their impact on pricing and execution of derivative trades.
  • Deliver various levels of support to team members and internal clients in the business units and corporate ALM function, such as analytical, pricing and reporting support.
  • Assist to Negotiate CSA’s, ISDA’s, MRA’s and clearing broker agreements.
  • Contribute in various front office related projects, i.e. upgrading the Derivative Systems Infrastructure.

This kind of a job will require you to have a bachelors degree in mathematics, actuarial science, quantitative finance, economics or related field. You should also have at least a few years of derivative trading experience in various product markets (particularly Equity space). Your career prospects can be better if you have an advanced certification such as CFA, FRM, ASA or FSA. However, a certification like this is not a core requirement.