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Many traders trade with bullish or bearish perspective in the underlying instrument. Traders who wishes to take a directional position in the underlying instrument has the choice of doing so in either the instrument itself or in the option market.
There are numerous strategies available for taking advantage of bullish or bearish perspective in the underlying instrument. These strategies are called directional strategies. List of directional strategies used by professional options trader:
| If a rise in underlying instrument is expected | If a fall in underlying instrument is expected |
| Long call | Short call |
| Short put | Long put |
| Bull spread | Bear spread |
| Long fence | Short fence |
| Long combo | Short combo |
| Long synthetic call | Short synthetic call |
| Short synthetic put | Long synthetic put |
| Long semi-futures | Short semi-futures |
| Long synthetic semi-futures | Short synthetic semi-futures |
Note:
ATM or At-the-money: Option whose exercise price is the same as the market price of the underlying asset.
ITM or In-the-money: a call is said to be "in-the-money" when the value of the underlying instrument is greater than the option strike price. A put is "in-the-money" when its strike price is greater than the value of the underlying instrument.
OTM or Out-of-the-money: a call is "out-of-the-money" when the value of the underlying instrument is less than the option strike price. A put is "out-of-the-money" when its strike price is less than the value of the underlying instrument.
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| Anticipations and characteristics | Market direction up (delta>0) and implied volatility up (vega>0).
Limited loss - Unlimited profit - Important cost. |
Market direction down (delta<0) and implied volatility down (vega<0)
Unlimited loss - Limited profit - Cash credit. |
| Strategy | Strategy: Buy call. Buy OTM call if very bullish, Buy ITM call if less. | Strategy: Sell call. Sell ITM call if very bearish, Sell OTM call if less. |
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| Anticipations and characteristics | Market direction up (delta>0) and implied volatility down (vega<0)
Unlimited loss - Limited profit - Cash credit. |
Market direction down (delta<0) and implied volatility up (vega>0)
Limited loss - Unlimited profit - Important cost. |
| Strategy | Strategy: Sell put. Sell ITM put if very bullish, Sell OTM put if less. | Strategy: Buy put. Buy OTM put if very bearish, Buy ITM put if less. |
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| Anticipations and characteristics | Market direction up (delta>0), and implied volatility direction depends on the strikes.
Limited loss - Limited profit - Low cost. |
Market direction down(delta<0), and implied volatility direction depends on the strikes.
Limited loss - Limited profit - Low cost. |
| 2 ways of a creating spread | Long call spread or bull spread: Buy a call and sell a call with a higher strike
If a rise in implied volatility is expected :sell 1*OTM call / buy 1*ATM call. If a fall in implied volatility is expected:sell 1*ATM call / buy 1*ITM call. Short put spread or bull spread: Buy a put and sell a put with higher strike. If a rise in implied volatility is expected : buy 1*ATM put / sell 1*ITM put. If a fall in implied volatility is expected: buy 1*OTM put / sell 1*ATM put |
Short call spread or bear spread: Sell a call and buy a call with a higher strike
If a fall in implied volatility is expected:sell 1*ATM call / buy 1*OTM call If a rise in implied volatility is expected:sell 1*ITM call / buy 1*ATM call. Long put spread or bear spread: Sell a put and put a put with higher strike If a fall in implied volatility is expected: buy 1*ITM put / sell 1*ATM put. If a rise in implied volatility is expected: buy 1*ATM put / sell 1*OTM put. |
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| Anticipations and characteristics | Market direction up (delta>0), implied volatility direction depends on the strikes.
Limited loss - Limited profit - Important cost - Risk profile at expiration equivalent to a bull spread. |
Market direction down(delta<0), implied volatility direction depends on the strikes.
Limited loss - Limited profit - Important cost - Risk profile at expiration equivalent to a bear spread. |
| Strategy | Long fence: Buy underlying, buy put and sell call with a higher strike
If a rise in implied volatility is expected: buy Underlying / sell OTM call / buy ATM put. If a fall in implied volatility is expected: buy Underlying / sell ATM call / buy OTM put. |
Short fence: Sell underlying, sell put and buy call with a higher strike
If a rise in implied volatility is expected: sell Underlying / sell OTM put / buy ATM call. If a fall in implied volatility is expected: sell Underlying / sell ATM put / buy OTM call. |
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| Anticipations and characteristics | Market direction up (delta>0) and implied volatility neutral du (vega=0)
Unlimited loss - Unlimited profit - Low cost - Risk profile at expiration equivalent to buy Underlying. |
Market direction down (delta<0) and implied volatility neutral du (vega=0)
Unlimited loss - Unlimited profit - Low cost - Risk profile at expiration equivalent to sell Underlying. |
| Strategy | Buy call and Sell put with same strike. | Sell call and Buy put with same strike. |
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| Anticipations and characteristics | Market direction up (delta>0) and implied volatility up (vega>0)
Limited loss - Unlimited profit - Important cost - Risk profile at expiration equivalent to buy a call. |
Market direction down (delta<0) and implied volatility up (vega>0)
Unlimited loss - Limited profit - Important cost - Risk profile at expiration equivalent to sell a call. |
| Strategy | Buy put and Buy Underlying. | Sell put and sell Underlying. |
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| Anticipations and characteristics | Market direction up (delta>0) and implied volatility down (vega<0)
Unlimited loss - Limited profit - Important cost. |
Market direction down (delta<0) and implied volatility up (vega>0)
Limited loss - Unlimited profit - Important cost. |
| Strategy | Sell call and Buy Underlying. | Buy call and sell Underlying. |
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| Anticipations and characteristics | Market direction up (delta>0) and implied volatility depends on the strikes.
Unlimited loss - Unlimited profit - Low cost. |
Market direction down (delta<0) and implied volatility depends on the strikes
Unlimited loss - Unlimited profit - Low cost. |
| Strategy | Long semi-futures: Sell put and Buy call with a higher strike.
If a rise in implied volatility is expected : sell 1* OTM put / buy 1* ATM call If a fall in implied volatility is expected: sell 1* ATM put / buy 1* OTM call |
Short semi-futures: Buy put and sell call with a higher strike.
If a rise in implied volatility is expected: sell 1* OTM call / buy 1* ATM put If a fall in implied volatility is expected : sell 1* ATM call / buy 1* OTM put |
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| Anticipations and characteristics | Market direction up (delta>0) and implied volatility depends on the strikes.
Unlimited loss - Unlimited profit - Important cost. |
Market direction down (delta<0) and implied volatility depends on the strikes
Unlimited loss - Unlimited profit - Low cost. |
| 2 ways of creating synthetic semi-futures | Long call semi-futures synthetic: Buy call, Sell call with lower strike, and Buy Underlying.
If a rise in implied volatility is expected : buy Underlying / buy ATM call / sell ITM call. If a fall in implied volatility is expected: buy Underlying / buy OTM call / sell ATM call. Long put semi-futures synthetic: Buy put, Sell put with lower strike, and Buy Underlying. If a rise in implied volatility is expected : buy Underlying / buy ATM put / sell OTM put. If a fall in implied volatility is expected: buy Underlying / buy ITM put / sell ATM put |
Short call semi-futures synthetic: Sell call, Buy call with lower strike, and Sell Underlying.
If a rise in implied volatility is expected : sell Underlying / buy ATM call / sell OTM call If a fall in implied volatility is expected: sell Underlying / buy ITM call / sell ATM call. Short put semi-futures synthetic: Sell put, Buy put with lower strike, and Sell Underlying. If a rise in implied volatility is expected : sell Underlying / buy ATM put / sell ITM put If a fall in implied volatility is expected: sell Underlying / buy OTM put / sell ATM put. |
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