What is Speculating?

Hedgers reduce their business risk by taking an opposite position in the market to what they are trying to hedge.

For example, farms may want to protect their grains from declining in value.

They will add the appropriate option position to profit if the particular grain declines to protect their cash side.

The main difference between hedging and speculating is speculators aren’t protecting anything.

Not everybody that trades grain or livestock futures and options are farmers.

Anybody around the world that wants to profit from a direction in grains (or livestock, currencies etc) can trade them.

Typically, speculators just want to make money on any direction the market is going on any type of asset.

It might be somebody who thinks gold is going to increase because of market uncertainty so they take a long gold futures position.

Or maybe somebody believes oil will decline because there is an oversupply so they take a short oil futures position.

Speculators may hold their positions for any length of time from a minute to months depending on their trading philosophy.