$$ Option Strategies to Take Advantage of Price & Volatility Movements

Option prices are primarily determined by:

1.  Whether and how much the option is in the money (i.e. intrinsic value), and

2.  The time value of the option.

Time value is a function of several things.  One of the main drivers is volatility.  The greater the volatility, the higher the time value component of the option price, all other things being equal.   Volatility generally rises when prices drop, and falls when prices rise. 

During up trends, you might think that buying call options on price dips makes sense.  However, this strategy has a couple of problems:

1.  After a price dip, volatility will be relatively high.  So, you are paying a huge premium for the time value of the option.

2.  If you are right and the price of the underlying moves upward, your reward is sabotaged by falling volatility, i.e. falling time value of the option.  

Accordingly, I prefer to sell puts on dips in up trends.  This is a "premium collection" strategy.  My gain is limited to the amount of premium I collect. 

By selling puts when volatility is high, my premium is increased (because the time value component of the option price is increased).  If the up trend resumes as I expect and price moves upward (and volatility falls), then:

1.  The puts I sold become further out of the money, and

2.  The time value component of the puts I sold falls. 

Both of these things are good for me.  I want the puts I sold to expire worthless to the put buyer. 

IMO, selling puts on dips in uptrends is a far superior strategy to buying calls on dips in uptrends because with selling puts, I benefit from both price and volatility movement.  I prefer selling puts that are slightly out of the money with an expiration date 2-3 months out.  During a multi-year up trend, I hope to have ~3 opportunities to sell puts per year.   

In downtrends, on the other hand, buying puts on rallies takes advantage of both price and volatility movement.  After a rally, volatility will be relatively low.  Should prices resume their decline, volatility will rise.  All option buyers benefit from rising volatility.  And puts benefit from falling prices. 

IMO the best way to capture the benefits of falling prices and rising volatility is to purchase longer term (6 months to a year) out of the money puts.  You want some time left on your puts after the expected price decline occurs.  This way, you maximize the benefit of the volatility increase. 

Options are a complicated subject.  The foregoing is an oversimplified treatment, but the concepts are sound.