Market Participant Groups

There are three main groups of participants in the derivatives market (excluding market makers): hedgers, speculators, and arbitrageurs.

Hedgers engage in derivatives trading to hedge against the risk of adverse price movements. They use derivative instruments to lock in current prices for future transactions, protecting themselves from unexpected market volatility. Hedgers are willing to forgo some or all potential profits to ensure price stability and safety.

Speculators take on high risks in pursuit of high returns from price fluctuations. They predict price trends and execute trades to capitalize on market movements. Speculators may hold long positions expecting prices to rise, short positions expecting prices to fall, or both long and short positions on the same underlying asset to exploit price differentials.

Types of Speculators Based on Holding Period:

Position Traders hold positions for weeks, months, or even years, typically relying on long-term fundamental and technical analysis.

Swing Traders hold positions from a few days to a few weeks, taking advantage of short-term trends.

Day Traders close positions within the same day, not holding any overnight positions, focusing on intraday price movements.

Scalpers close positions within seconds to minutes, seeking to profit from very small price changes.

Arbitrageurs participate in the market with the goal of achieving risk-free profits by simultaneously trading on different markets. They exploit price discrepancies between various markets or contracts.

Common Arbitrage Strategies:

Spot-Futures Arbitrage involves capitalizing on price differences between the spot market and the futures market. For example, an arbitrageur might buy a commodity on the spot market at the current price while simultaneously selling a futures contract for the same commodity if the futures price is higher.

Intertemporal Arbitrage involves buying and selling futures contracts for the same commodity but with different expiration dates on the same exchange. For instance, an arbitrageur might buy a February crude oil futures contract at a lower price and sell an April crude oil futures contract at a higher price.

Geographical Arbitrage takes advantage of price discrepancies for the same commodity in different delivery locations. For example, an arbitrageur might purchase a commodity in the domestic market and sell it at a higher price in the international market.