Advanced Option Trading Strategies
and Concepts

3. How to Trade Markets that are Trending

Here are a couple of different trading strategies to consider for a market that's slowly trending:

1 (a) Initiate a bull call spread if the market is trending up. Close the spread for a profit if the spread doubles in premium. If the market instead declines, sell an additional call when you perceive the uptrend has ceased. You then are positioned with a call ratio spread with little or no loss on the downside but profit potential if the rally resumes later.

1 (b) Initiate a bear put spread if the market is trending down, and close it for a profit if the spread doubles. If the market rallies, sell an additional put when you think the downtrend is over. You then have a put ratio spread with little or no loss on the upside but profit potential if the downtrend later resumes.

2 (a) Initiate a put ratio spread for a credit if the market is trending up and if implied volatility is average to high. Close the spread for a profit if the market continues to trend up and the credit shrinks to even money. If the market reverses direction and breaks lower, there are 3 alternatives to choose from:

• close the spread if it loses a predetermined amount (your trigger point),
• adjust the spread by buying one of your short puts and selling a further out of the money put (executing a bear put spread), or
• adjust by buying an out of the money put and selling an out of the money call (executing a synthetic short position).

2 (b) Initiate a call ratio spread for a credit if the market is trending down and if implied volatility is average to high. Close the spread for a profit if the market continues to trend down and the credit shrinks to even money. If the market reverses direction and moves higher, there are 3 alternatives to choose from:

• close the spread if it loses a predetermined amount (your trigger point),
• adjust the spread by buying one of your short calls and selling a further out of the money call (executing a bull call spread), or
• adjust by buying an out of the money call and selling an out of the money put (executing a synthetic long position).

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