This Guide is presented for educational purposes only. Actual trading decisions should include, but limited to:

 

Ø      Anticipated Timeframe of the trade;

Ø      Whether option premiums appear to be “rich” (ie over priced);

Ø      Range (how large is the anticipated price movement);

Ø      Degree of Risk Aversion and anticipated Risk/Reward ratio

 

Strength and Direction

Of Market Opinion                            Strategy         

 

Very Bullish:                                         Buy Futures or Buy Calls

Bullish to Mildly Bullish:                        Buy Futures

Steady to mildly Bullish:                        Sell Puts

 

Very Bearish:                                        Sell Futures or Buy Puts

Bearish to Mildly Bearish:                     Sell Futures

Steady to mildly Bearish:                       Sell Calls

 

Volatile Markets:                                  Buy Puts and Calls together

Unsure about Trend                              1. Strike prices close to each other:                              

or Direction (equal chance                    More expensive; therefore must have a very     

for sharp rally or sharp                          high expectation of a major price move one

decline)                                                way or the other.

 

2. Strike prices further apart:

Less expensive but greater price movement is

needed to reach breakeven. Best used with lower

expectation of an explosive move.

 

Flat, steady markets:                             Sell Puts and Calls together

                                                            1. The closer the put and call strikes

are to each other, the profit potential

is maximized but the risk of loss increases.

2. The further apart the strikes are, the

profit potential is reduced but the risk of loss is decreased