Six Main Directional Outlooks in Options Trading



Six Main Directional Outlooks in Options Trading - Introduction



The basis of almost every investment decision lies in a directional outlook on the instrument that is being invested. Investors typically buy when the outlook is bullish and sell or short when the outlook is bearish. Indeed, almost every investor know that the price of an asset either goes up, down or sideways and invest or trade according to that outlook. However, in options trading, there are actually as many as Six different directional outlooks that one can make in order to truly select the correct options strategy to use and optimise profits.

This tutorial will explore all Six main directional outlooks in options trading and the corresponding options strategies for each outlook.



Six Main Directional Outlooks in Options Trading - Content



Overview | Neutral | Volatile | Moderately Bullish | Sustained Bullish | Moderately Bearish | Sustained Bearish


Six Main Directional Outlooks in Options Trading - Overview


Due to the versatility and fine degree of price targeting that can be achieved using options strategies, options traders typically adopt up to 6 different directional outlook on the underlying asset rather than just the basic 3 that most traders are concerned about. Indeed, options trading is a trading method that rewards precision and accuracy. The more precise you can be about your outlook, the better you can optimize your profits and minimize potential losses.

For instance, assuming a stock is trading at $50 and a stock trader is bullish on the stock. The stock trader makes a $10 profit if the stock goes up to $60 whether or not he has expected the stock to rise to $60. However, an options trader expecting the stock to rise from $50 to $60 could make as much as three to ten times more profit than an options trader who is merely bullish on the stock with no specific target in mind.

As such, the Six main directional outlook in options trading are; Sustained Bullish, Moderately Bullish, Neutral, Volatile, Moderately Bearish and Sustained Bearish.

Six Main Directional Outlooks In Options Trading
Six Main Directional Outlooks in Options Trading


Six Main Directional Outlooks in Options Trading - Neutral


Neutral outlook is a profitable outlook unique only to options trading. In stocks trading, there is no way to profit if a stock is expected to remain stagnant (except through dividends). However, in options trading, there are literally tens of ways to profit from a neutral outlook depending on the expected state of neutrality of the underlying asset. Options strategies designed to profit from a neutral stock is collectively known as "Neutral Options Strategies".

Neutral in options trading does not mean that the price of the underlying stock being completely still or stagnant for an extended period of time. No, that kind of situation is almost impossible as asset prices are changing every single minute. A neutral outlook in options trading simply mean expecting the price of the underlying asset to move within a horizontal price range. The more precise and accurate you can be with the width of that price range, the better you can be at optimizing profits through the use of the correct neutral options strategy suitable for that kind of price range. When you expect the price of the underlying stock to remain neutral within an extremely tight price range, you are expecting a "Tight Neutral" trend. when you expect the price of the underlying stock to remain neutral within a wider price range, you are expecting a "Loose Neutral" trend.

An example of how the expected neutral price range can affect your choice of neutral options strategy is the consideration behind the use of a Butterfly Spread or Condor Spread, both neutral options strategies. If you are sure that the price of the underlying asset is going to remain almost completely still (Tight neutral trend), the Butterfly Spread would better optimize your profitability than a Condor Spread. However, if you are expecting a Loose Neutral trend, a Condor Spread would do better than a Butterfly Spread.

Read the full tutorial on Neutral Options Strategies.

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Six Main Directional Outlooks in Options Trading - Volatile


Volatile outlook is also an unique profitable outlook in options trading. Volatile means profiting no matter if the price of the underlying stock breaks out to upside or downside. Volatile options strategies are options strategies designed to profit under such conditions of uncertainty and are commonly used ahead of major news or earnings releases in order to profit from either direction depending on how the release turn out.

Not only are volatile options strategies used for speculating in an uncertain price breakout but they can also be used to speculate on a property unique to options trading; Implied Volatility. Implied volatility is the volatility expectation of the underlying stock reflected in the extrinsic value of its options. Extrinsic values rise as implied volatility increases and drops as implied volatility decreases. Options traders using volatile options strategies are able to profit from such rise and fall of implied volatility without any movement in the price of the underlying stock at all!

Read the full tutorial on Volatile Options Strategies.


Six Main Directional Outlooks in Options Trading - Moderately Bullish


Options trading is a trading method that rewards precision. Being moderately bullish means that you expect the price of the underlying stock to increase to a certain pre-determined price instead of being bullish for an unknown extended period of time to an unknown high price. When you are moderately bullish, you would apply what are known as "Limited Profit" Bullish Options Strategies. This means that if you expect the price of the underlying stock to increase from $10 to $15, you are having a "moderately bullish" outlook (even though $5 gain is really very substantial. As such, the term "moderately" here actually means having a set price target versus expecting the price to keep rising with no limits) you would make a much better rate of return using a limited profit bullish options strategy than an unlimited profit bullish options strategy designed for sustained rallies.

There are two kinds of limited profit bullish options strategies for use when you have a moderately bullish outlook; Limited Risk Limited Profit and Unlimited Risk Limited Profit.

Bullish options strategies with limited risk and limited profit are typically debit spread strategies that profit only if the price of the underlying stock rises beyond a certain breakeven point. However, bullish options strategies with unlimited risk and limited profit are typically credit strategies that profit not only when the price of the underlying stock rises but typically also when the price of the underlying stock remains stagnant! Yes, two directions at the same time (with the drawback of having an unlimited risk potential of course, nothing is perfect in options trading).

Read the full tutorial on Bullish Options Strategies with Limited Risk and Limited Profit and Bullish Options Strategies with Unlimited Risk and Limited Profit.


Six Main Directional Outlooks in Options Trading - Sustained Bullish


Sustained bullish is when you expect the price of a stock to move higher perpetually. There are stocks such as gold based funds that generally do well over a long period of time and when you expect a stock to rise without any predetermined price limit, usually for the mid to long term, you would apply what are known as "Unlimited Profit" Bullish options strategies. Unlimited profit strategies mean that the value of the options position will rise as long as the price of the underlying stock keep rising. The simplest of unlimited profit bullish options strategies would be of course the Long Call strategy where you simply buy a longer term call option and hold on to it.

The challenge when you have a sustained bullish outlook on a stock is usually which expiration month to buy the options on. Of course the sensible thing to do would be to buy as far out as you expect the price of the underlying stock to rally for. Sometimes you may expect an explosive move within the next month with no set target to topside. In this case, you could also use an unlimited profit bullish options strategy on the nearest expiration month to profit from it. As such, sustained bullish outlook also applies when you expect an extremely strong short term bullish move with no set topside price target.

Read the full tutorial on Bullish Options Strategies with Limited Risk and Unlimited Profit.


Six Main Directional Outlooks in Options Trading - Moderately Bearish


Moderately Bearish outlook is of the same nature as a moderately bullish outlook. Being moderately bearish means that you expect the price of the underlying stock to decrease to a certain pre-determined price instead of being bearish for an unknown extended period of time to an unknown lower price. When you are moderately bearish, you would apply what are known as "Limited Profit" Bearish Options Strategies. This means that if you expect the price of the underlying stock to decrease from $60 to $55, you are having a "moderately bearish" outlook (even though $5 drop is really very substantial. As such, the term "moderately" here actually means having a set price target versus expecting the price to keep dropping with no limits) you would make a much better rate of return using a limited profit bearish options strategy than an unlimited profit bearish options strategy designed for sustained declines.

There are two kinds of limited profit bearish options strategies for use when you have a moderately bearish outlook; Limited Risk Limited Profit and Unlimited Risk Limited Profit.

Bearish options strategies with limited risk and limited profit are typically debit spread strategies that profit only if the price of the underlying stock drops beyond a certain breakeven point. However, bearish options strategies with unlimited risk and limited profit are typically credit strategies that profit not only when the price of the underlying stock drops but typically also when the price of the underlying stock remains stagnant! Yes, two directions at the same time (with the drawback of having an unlimited risk potential of course, nothing is perfect in options trading).

Read the full tutorial on Bearish Options Strategies with Limited Risk and Limited Profit and Bearish Options Strategies with Unlimited Risk and Limited Profit.


Six Main Directional Outlooks in Options Trading - Sustained Bearish


Sustained bearish is when you expect the price of a stock to move lower perpetually. When you expect the price of a stock to drop without any predetermined price limit, usually for the mid to long term, you would apply what are known as "Unlimited Profit" Bearish options strategies. Unlimited profit bearish options strategies mean that the value of the options position will rise as long as the price of the underlying stock keep dropping. The simplest of unlimited profit bearish options strategies would be of course the Long Put strategy where you simply buy a longer term put option and hold on to it. Of course, unlike a rally where there is no limit to how high the price of a stock can rise to, the price of a stock can only drop to zero. As such, there is technically a limit to how low a stock can drop even though you may hold a "Sustained Bearish" outlook.

Like the sustained bullish outlook, the challenge when you have a sustained bearish outlook on a stock is usually which expiration month to buy the put options on. Of course the sensible thing to do would be to buy as far out as you expect the price of the underlying stock to drop for. Sometimes you may expect an explosive move within the next month with no set target to downside. In this case, you could also use an unlimited profit bearish options strategy on the nearest expiration month to profit from it. As such, sustained bearish outlook also applies when you expect an extremely strong short term bearish move with no set downside price target.

Read the full tutorial on Bearish Options Strategies with Limited Risk and Unlimited Profit.


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