- When the rise or fall of a company’s stock has become very clear, and you are highly confident in your judgment, you can be an option buyer to maximize your potential profits by purchasing either a call or put option.
- When you predict that a company will experience significant volatility in the future, but you are unsure whether it will sharply rise or sharply fall, you can be an option buyer and choose a straddle or strangle strategy. These strategies allow you to profit from large price movements in either direction. This is similar to the option strategy I used when GME stock was at its peak.
- If you like to capture big market moves and have a bit of a gambler’s mentality but don’t want to bear unlimited potential losses, then being an option buyer is a safer choice.
- If you are holding a stock long-term and fear negative news that could cause the price to drop, you can be a buyer of put options for hedging. This way, even if the stock drops, you can still offset losses through profits from the put options.
- If you expect market volatility to increase, and you believe implied volatility will rise, buying options can allow you to benefit from this. The value of options typically rises with increasing implied volatility, even if the underlying asset price doesn’t change significantly. If the market is calm, but you expect upcoming news or opportunities to stir things up, you can pay to lock in this uncertainty. When investment enthusiasm rises and implied volatility increases, even if the underlying stock remains unchanged, the price of the option will rise. Selling at this point can still result in profit.
Example: Suppose an option is priced at $2, and you expect its value to increase in the future. You can purchase it, and if the market acknowledges this potential, even without changes in the underlying asset, the implied volatility of the option could rise. Your option’s value increases from $2 to $3, allowing you to sell and make a $1 profit.
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