The other use of credit default swaps, and the position usually taken by the other side of a trade, is speculation. Like investing in stock options, credit default swaps give a speculator a way to make a large profit from changes in a company's credit quality. For example, if a company has outstanding debt, and if the company has been having problems, it may be possible to buy the outstanding debt (usually bonds) at a discounted price. For example, if the company has one million dollars worth of bonds outstanding (one million dollars worth of debt), it might be possible to buy the debt for 900 thousand dollars from another party if the company has been doing badly and the other party is worried that the company won't repay (the other party would be willing to take some loss to recover some money). If the company does in fact repay the debt, you would receive one million and make a 100 thousand dollar profit. With a credit default swap, one could sell the other investor credit protection and receive, for example, one hundred thousand dollars, and keep the premium if the company does not default. In this case one would make a hundred thousand dollar profit without having invested anything. It is also possible to buy and sell credit default swaps that are outstanding. Like the bonds themselves, the cost to purchase the swap from another party may fluctuate as the perceived credit quality of the underlying company changes. But these pricing differences are amplified compared to bonds. Therefore someone who believes that a company's credit quality would change could potentially profit much more from investing in swaps than in the underlying bonds (although encountering a greater loss potential). http://en.wikipedia.org/wiki/Credit_default_swap the carnage in housing.. huge potential for profit in CDS's.