Who Trades Options?
Two broad categories of players exist in the option markets: risk seekers and risk avoider’s.
A risk seeker, also known as a speculator, is the type of trader that is trying to profit from a prediction in market direction. A speculator will have his or her own method of analysing the market and then use the options market to make a bet on his/her analysis.
A risk avoider, also known as a hedger is in the market because s/he is trying to transfer risk to the speculator. A hedger will use the option market to create insurance for his/her physical position against an adverse market movement.
Hedgers will almost always engage in option spread trading, which is something we haven’t covered yet. But it is basically simultaneously buying and/or selling different options/shares together to provide an ideal risk/reward profile.