Derivative trading is when traders speculate on an asset's future price action by purchasing or selling derivative contracts, with the goal of making higher profits than if they bought the underlying asset outright.

A derivative is a financial instrument whose value is based on the value of another asset, according to Collins English Dictionary.

Derivatives trading involves buying and selling financial contracts whose value is derived from an underlying asset, such as stocks, commodities, currencies, or indices. Common types of derivatives include futures, options, swaps, and forwards. These instruments are used for hedging risks, speculation, or leveraging positions to amplify potential gains or losses.

In derivatives trading, traders don't own the underlying asset but speculate on its price movement. For instance, a futures contract obligates the buyer and seller to trade the asset at a predetermined price on a set date. Options provide the right, but not the obligation, to buy or sell the asset.

While derivatives offer profit opportunities, they carry significant risks due to leverage and market volatility, requiring careful risk management.