Chapter 13
Derivatives

A derivative is a contract whose value is driven by something else — a stock, an index, a barrel of oil, an interest rate. This chapter covers the three families a private investor actually meets: options, futures, and swaps. Two facts organize everything in it, and knowing them up front will save you rereading.

First, for a portfolio of real size, derivatives serve three legitimate functions: trading volatility, not direction, hedging positions you cannot or will not sell, and engineering payoff shapes the cash market cannot produce. Directional speculation — the use case the brokerage app is built around — is not on the list, and the chapter keeps returning to why.

Second, your tax regime is decided by the instrument, not how you manage it. Equity options live under one set of rules, with holding periods, wash sales, and straddle traps; broad-based index options and all futures are marked to market and taxed 60/40 under a second, far friendlier one; swaps sit under a third. The same market exposure bought through two different tickers can differ by ten points of after-tax return, which makes the classification sections (section “Taxation of Equity Options” and section “Section 1256 Contracts and the 60/40 Regime”) the most valuable pages here. The chapter closes with which of this, if any, belongs inside a retirement account (section “Derivatives Inside Retirement Accounts”) — less than you think.