The classical books about option trading, often emphasize option strategies as to expecting a future move, and according to that, either buy a call if you are expecting a move upward of the underlying, or buy a put if you are expecting a down move. That is a very simplified approach which neglects a big part of option trading which is the trading of volatility.
What do I mean by that? The option price is affected by a few variables such as interest rates, the price of the underlying and the neglected volatility in most introductory textbooks. What we must understand though is that volatility affects both the price of the puts and the price of the calls. If the volatility is high, both the put and the call option would cost more. The intuitive argument is of course there is much more uncertainty and a bigger risk. And where is risk, there is a bigger risk premium.
This means that in the option trader’s view, it’s not a question whether to buy a call or a put, because they are essentialy the same. If he expects a rise in volatility, it does not matter if he will buy a call or a put since the price of both would rise. The same argument goes for the seller of an option but in a different direction.
Another argument is that in the Black and Scholes formula, the theorem says you could constantly hedge your risk. The problem arises when it comes to estimating the future volatility. The volatility that matters in the Black and Scholes formula is the future volatility. That means that when we buy an option, we are essentialy trading it’s volatility because we don’t really know what the future volatility would be.
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