Can someone quickly remind me of which stratgies are used when? - Which strategy gains when volatility is high, low, underlier is up, down, etc. I had this thing down a month ago, but I am drawing a blank on it when I try to remember it today. I am at work with no books to refer, please help.
bull spread - makes sense when you are expecting the underlying to go up.
bear spread - underlying expected to go down.
Bull spead : long x1 and short x2
the investor expect that underlying will go up, i agree. Did he think that price not go pass X2, so he short at x2 to get some more (X2 short premium).
If he simply think that the price go up, why he short at x2 to limit his potential unlimited profit ?
the reason why going LONG a Call option does not make sense is because if your expectation goes wrong - and you end up going the other way - you LOSE big time. So you sell the Call option at X2 - so you limit your losses.
The selling of the X2 call is not for profit but to limit your losses.
This is the first statement for the Bull Spread in the book:
A bull spread is designed to make money when the market goes up.
Just my private opinion for discussing, exactly anwer what curriculum says when we do the test. I just think of sommthing like a butterfly strategy with low volatility (unknow direction). In case of bull spread, he expect a going up moving…