Series 7 - General Securities Representative Exam
A trader wants to make an aggressive bet on the direction of the stock. The stock has been going up and up at an astonishing rate; increasing from $316 per share to $608 per share in the last 3 months. He wants to buy call options, but after inspecting the options curve, he notices the out-of-the money calls have a huge amount of IV - Implied Volatility, making them very expensive. What can he do to potentially capitalize on the situation?
The trader can make a bullish directional play using a vertical debit spread (long call spread). He will buy a call option and sell a further out-of-the money call option. This will help reduce his capital outlay and amount of premium spent when volatility is high. The OTM calls have very high volatility in this example. By selling those, he can potentially capitalize on the high OTM option volatility