Options Trading Mastery: Time Decay and Volatility Trading Opportunities (2)

Creating the vertical spread by selling an at-the-money option and buying an out-of-the-money or in-the-money option as a hedge looks like a good idea, but now there are a couple choices.


Should you do the put spread or the call spread?


Should you buy it or sell it?


The decision of what to do from here should first be based on which way you think the stock will move.


Although you are playing for time decay and you are assuming an overall lack of movement, you can't expect the stock not to move at all.


So even though you are playing time decay, you still want to form an opinion about in which direction the stock is most likely to move.


By doing this, you've now give yourself another way of making the trade profitable.


You are playing for a lack of movement but now you can still win if you pick the right direction.


This scenario presents you with two ways to win and only one to lose.


Now that you have picked which at-the-money strike you are going to sell and you've picked your anticipated stock position you still have a decision to make.


Do you do the call vertical spread or the put vertical spread?


Remember both the vertical call spread and a vertical put spread allow you to participate in either stock direction.


For the bulls, you can buy a vertical call spread or sell a vertical if you think that the stock will go up.


For the bears, you can buy a vertical put spread or sell a vertical call spread.


For each direction there are two choices to decide from. One is a purchase, one is a sale.


The best way to decide which to do, other than your own style or comfort ability is a simple risk/reward analysis.