Often times when traders first begin trading options, they have a difficult time deciding whether or not they should be buying options or selling them instead. With stocks, you are limited to buying and selling shares. But with options, you have calls, puts, combination spreads and to make things more confusing; different strike prices and expiration dates to take into account. And just when you thought you had it all down, you then have to consider implied volatility in all of this.
To give you a very simple example of the dilemma you may face, consider the following example:
Stock ABC is trading at $50.00 per share and you believe that within the next month, the price is going to move down to $45.00 per share. Consider the different ways you can take advantage of this scenario:
As you can imagine, by the examples that I provided you, there are numerous ways to take advantage of a simple price move in the underlying asset; but to help you decide if you are going to be a buyer or a seller, you have to consider three important factors.
1. Are you expecting a powerful move or a minor move in the underlying asset? give pros and cons for each one
2. Do the options have substantial time till expiration (few months) or alternatively, have little time value left (few weeks)?
3. Does the underlying asset exhibit strong volatility and trading range or low volatility, trading range and movement?
Each of these issues must be carefully considered, before you decide to be a buyer or a seller, since each one of these factors plays a vital role in determining if you should be a buyer or a seller.