4. Bullish Directional Trades
In this chapter, we empirically examine the performance of directional bullish trades around earnings announcements. The most straightforward bullish option trades are (1) long positions in calls, and (2) short positions in puts. The different risk/return profiles of these two bullish trades are notable. Namely, long call positions have unlimited upside profit potential with a limited downside risk equal to the purchase price of the option. On the other hand, short put positions have an upside equal to the price of the put shorted, but the downside has greater risks. These risks are not unlimited because a price cannot fall below zero. As we will show shortly, in the worst case, put writers have to pay seven or eight ...
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