Buying Options: Differences Between A Speculative Play And An IV Play

There are several reasons why investors buy options. More often than not, the option purchases are for speculation. Sometimes, options purchases are for protection. But, another common use of options is to exploit the changes in the implied volatility of the options.

Here is a summary of the key differences between buying options for speculation and buying options to exploit the IV:

Criteria

Speculative Play

IV Play

Primary purpose

A bet that the underlying equity will be moving up or down

A bet that the underlying equity will become more volatile (or the overall market is going to be more volatile)

Secondary purpose

Can also be a bet on equity direction

Entry Point

Ahead of a big move in the equity

Ahead of a big move in volatility

Typical driver

An Event: Earnings, product launch, customer announcement, competitive announcement, etc.

An event, or a change in market sentiment

Exit Point

After the event

Before the event

What It Takes To Profit

Equity needs to make a big directional move

Equity flat or mak…