Types of traders in future and option markets, Financial Management

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Types of Traders in Future and Option Markets:

Hedgers

Hedgers use the futures and options market principally for risk management purposes because of their exposure to price movements in the underlying securities market.

Hedgers provide the basic rationale for the existence of the market. They reduce price risk in the underlying market by either transferring it to a hedger with an opposite position in the market, or to a party willing to accept and trade the risk (a speculator).
An investor owning shares can lock in the selling price, or could buy put options to insure against prices falling below a specified level. Conversely, an investor intending to buy shares in the future can buy futures to set their buying price, or buy call options to insure against prices rising above a specified level.

Speculators

Speculative trading is the intention to make a profit from correctly predicting directional changes in price. Speculators play an important role in the futures and options markets by providing liquidity that allows hedgers to enter and exit positions in the market with ease.

Speculators are concerned only with price changes. They are motivated by the potential profit-making opportunity afforded in the market. Their motivation is not to hedge any underlying physical shareholdings. They use their risk capital in an attempt to take advantage of favorable price fluctuations in the market by buying contracts when they think prices will rise and selling when they believe they will fall. If they are correct they make a profit. If not, they make a loss.
Speculators benefit from leverage, low transaction costs, ease of opening and closing positions, narrow bid-ask spreads and the ability to "short" the market. Liquidity, volatility and a tendency for the market to follow trends provide opportunities for generating trading profits.

Arbitrageurs

Arbitrageurs take advantage of price discrepancies between the underlying market and the derivatives market with the intention of making a profit, by buying in the cheaper market and selling in the more expensive market. Over time, the actions of the arbitrageur usually force the markets back into equilibrium. Arbitrageurs make risk-free profits, although arbitrage opportunities occur infrequently.
Spread Traders

Spread traders' profit by correctly predicting the future shape of the price curve. This can be achieved, for example, by buying (or selling) the short dated futures contract and selling (or buying) the longer dated futures contract. Profits will arise if the price curve becomes less positive (or more positive).

 


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