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The Options Trader: Who’s Involved

Posted by Pete Stolcers on March 23, 2010

Option Trading Question

Who is involved in options trading?

Option Trading Answer

There are two very broad categories of traders who exist in the option trading industry. These two groups are known as risk seekers and risk avoiders.

The risk seeker is sometimes also called a speculator and is the type of options trader who tries to profit from a prediction in the market direction. Each person will have his or her own method of looking at the market and analyzing it before they use the options market to make a bet based on these predictions. They spend a lot of time researching and finding out as much information about the stock that they are looking at investing in before making any decisions. To them, option trading is more of a science than anything else.

The other kind of option trader, a risk avoider, can also be called a hedger and is in the market simply to try and transfer all of the risk, or at least as much as possible, to the speculator. A hedger will look at the option market and use it to create insurance for their physical position against an adverse market movement. Hedgers will nearly always engage in option spread trading which is simultaneously buying and/or selling different options or shares together to create an ideal risk and reward profile. To hedgers, option trading is more of an art than a science. They are constantly on the move, playing the game.

Whether you feel more comfortable as a risk seeker or a risk avoider, you are sure to find a style that suits you if you just play around a little bit with it. If you are new to options trading, then you should try the risk seeker role first as it is the simplest to grasp for a beginner. Once you are comfortable with that, then move on to try the risk avoider role, so that you can make an educated decision as to the role that you would like to play with option trading.

Option Trading Comments

  • On 06/12, Centurion said:

    Pete-

    This is a great blog. Have been trading near (next month) credit spreads (sell low puts, sell high calls) for about 15 months. Given the high vol, the premiums worked out well.Does your Bear call for later this year suggests straight call sells for the immediate future? What happens if we have both a bear turn and vol collapses? Will the premiums shrink to make this a low return, dangerously exposed strategy?

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