STRATEGY

The following types of option trades require an opinion of market direction bias (Up or Down).

  1. Buy an option (Call or Put) Long. This is also known as Buying Volatility or Buying Risk. A disadvantage with this strategy the trade will be facing Volatility Crush upon receipt of an earnings announcement, but many trades work out facing Volatility Crush.
  2.   Sell an option naked. Margin capital must be pledged. This is the riskiest option strategy but offers immense profit potential.
  3.   Spread trades – Spread trades are used by traders who are satisfied with obtaining a smaller portion of potential profit in exchange for a substantial reduction in risk.

I. Bullish (Debit) Call Spread
This Trade is undertaken with the expectation that the Underlying Stock will rise in price. The trader BUYS the Call with the LOWER exercise price and SELLS (WRITES) the HIGHER exercise price.
II. Bullish (Credit) Put Spread
This Trade is undertaken with the expectation that the Underlying Stock
will rise in price. The trader BUYS the Put with LOWER exercise price and SELLS (WRITES) the Put with the HIGHER exercise price.
III. Bearish (Credit) Call Spread
This Trade is undertaken with the expectation that the Underlying Stock
will decline in price. The trader BUYS the Call with the HIGHER exercise price and SELLS (WRITES) the Call with the LOWER exercise price.
IV. Bearish (Debit) Put Spread
This Trade is undertaken with the expectation that the Underlying Stock will decline in price. The trader BUYS the Put with the HIGHER exercise price and SELLS (WRITES) the Put with the LOWER exercise price.

Even though OT service is focused on option trading to extract the option premium a market participant may
BUY a stock long or SHORT SELL a stock.
BUY a stock futures contract or SELL a stock futures contract.