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chapter2/5 capture market volatility

Chapter 2

Capture Market Volatility

Another use of options is to capture premium during periods of volatility. When a stock moves abruptly, or there is anticipation of an event which is expected to affect the stock price such as litigation settlement, drug approval, scheduled earnings, or merger activity, etc., the price of the option will temporarily increase in advance of such an event.

Selling options in periods of high volatility will generate more revenue than selling during low periods of volatility. It is possible to collect high premiums by selling options, then buy the options back at a cheaper price when the volatility subsides.

Selling options outright can be risky, and there are numerous strategies that generate the bulk of returns through the sale of options with high premiums while hedging risk with either stock or similar option contracts with lower volatility and lower premiums. The most common complex option strategies are discussed in Chapter 5.


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