Directional Trading Strategies

Abstract

In most markets, there are only two ways to profit: one can either buy or sell some underlying asset. To profit, you have to predict correctly which direction the market will take and when. With options, you can also profit from correctly predicting market direction, but in addition, you can gain from changes in the perceptions of risk, and from the passage of time. Furthermore, options allow you to arbitrage price discrepancies easily and completely. In this chapter, I will emphasise directional trading strategies that can be used with options on Crude Oil futures, covering volatility strategies and arbitrage for other underlying assets in later chapters.