Choosing a Strategy from Your View
Answer two questions first: do you think it'll rise, fall or stay put? Will volatility grow or shrink? The answers lead you to the matching strategy.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Advanced Option Strategies, lesson 7: “Choosing a Strategy from Your View”
Answer two questions first: do you think it'll rise, fall or stay put? Will volatility grow or shrink? The answers lead you to the matching strategy.
Ask about direction first, then volatility
Your view on direction decides Call or Put; your view on volatility decides whether you buy or sell. Combine the two and you can find your spot in the strategy table.
Reading a position's Greeks
The Greeks tell you what a position is really betting on: Delta is direction, Vega is volatility, Theta is time. Once you've picked a strategy, check that they match your view.
Think about the worst case first
For the same view, some strategies cap the maximum loss and some have no limit. First check “what's the most I can lose?” and whether you can take it, then look at how much you can make. That matters more than guessing the direction right.
Key takeaways
- Your directional view decides calls vs. puts, and long vs. short.
- Your volatility view decides whether to be a buyer (expecting volatility to grow) or a seller (expecting it to shrink).
- There's no "best" strategy, only the one that best fits your view and your risk tolerance.
- Before placing the trade, make sure you can afford the worst-case loss.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click through all six cells: which strategies have positive Vega (hoping volatility rises)? Which are negative?
- “Not sure + will shrink” gives you the iron condor: is its Theta positive or negative? What does that mean?
- Compare “Bullish + will grow” with “Bullish + will shrink”: how do their maximum losses differ?
- Click the bear put spread under “Bearish · Volatility will fall”: how much does it cost to open? What's the maximum profit? What do the two add up to?
Quiz and explanations
- 1. You're bullish and think implied volatility is high (and will fall). What fits better?
- Answer: Selling a put or a bull spread.Bullish while wanting to be a volatility seller: sell a put, or use a spread to reduce your exposure to IV.
- 2. You have no view on direction, only that there'll be a big move. What fits?
- Answer: Buying a straddle.A long straddle makes money on a big move in either direction.
- 3. A position has Delta ≈ 0, negative Vega and positive Theta. What is it betting on?
- Answer: Sideways prices and falling volatility.Delta ≈ 0 means no directional bet; negative Vega wants IV to fall; positive Theta earns from time passing. Classic examples are iron condors and short straddles.
Terms in this lesson
- Delta: Roughly how much an option's price changes when the underlying rises $1; near 1 deep in the money, near 0 far out of the money.
- Greeks: Delta, Gamma, Vega, Theta and friends, which measure how an option's price responds to the stock price, changes in Delta, volatility and time.
- Theta: How much value an option loses with each passing day; the decay speeds up as expiration nears.
- Vega: How much an option's price changes for each 1-point rise in implied volatility; longer-dated, at-the-money options have more Vega.