Who plays in this market?

There are at least 5 categories of players in derivatives market. Irrespective of what you intend to do in the market, you would fall in any one of the 5 categories mentioned here.


As mentioned above, there are 5 categories:

  1. Hedgers
  2. Arbitrageurs
  3. Speculators
  4. Spreaders
  5. Amateurs


They are the real users of derivatives. In fact, derivative instruments were invented solely for the purpose of hedging or risk management. Hedgers are investors who want to reduce the risk of price fluctuation on their investments. The meaning of hedging, its uses and the way it’s done would be discussed in another post. Hedgers are basically risk averse investors.


Arbitrageurs are participants who are always on the look out for spot price anomalities between futures contracts and their underlying assets or between spot price of an asset in two different markets in order to reap a risk free return. Arbitrage is a source of risk free income. For example let’s assume that you have invested in 600 shares of Reliance. On one trading day, you notice that Reliance is trading at Rs 2000 on the BSE and Rs 2010 on the NSE. You sell your 600 shares on the NSE at Rs 2010 and simultaneously buy back the 600 shares on the BSE at Rs 2000. You profit in this case is 600*10 = 6000 less brokerages if any. This is one form of arbitrage. Arbitrage too, is discussed in a subsequent post in detail.


As in the case of any markets or business, there are speculators in derivatives market too. These are risk seekers, willing to risk their capital to make that extra buck, quickly!  They don’t do this blindly. In fact, experienced speculators know when to hold or to walk away from a trade. These guys engage in trades that involves substantial risk but at the same time has the potential to return huge profits if things work out to their advantage.


This is a category of very professional people who specialises in trading derivative contracts in combination with other derivatives or spot assets with the objective of reducing risk and making money in the process. Spreaders are experts in derivatives who would create complex transactions by smartly combining futures, options and spot markets. This is a very professional and specialised field.


People who enter the derivatives segment just to know what’s going around, to get a first hand feel of the derivatives market.  There could be students, aspiring derivatives traders etc..Everyday in the market, there is a small segment of people who are lured in by advertisements or by brokers and advisors. So, that’s the last of 5 classes of players in this segment.

Whichever way you enter derivatives market, you’re sure to be included in any one of the 5 categories mentioned above.

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