Purchase of a call/put option.Purchasing an option gives you limited risk. (The limited risk is the premium paid for the option plus any commissions or fees associated with placing a trade.) This strategy also gives us unlimited profit potential.
FAOAS uses this strategy for two main reasons. One the market has been trading in a range for a while, it is starting show signs of a breakout. The volatility has been low, so the option price does not have excess price value. Since no volatility price excess we can purchase an option close to or even at the money. Option is usually holding just time value. Use this in liquid markets only, especially if we purchased an out of the money option. You want to make sure you can exit trade if underlying futures contract does not make it to your strike price.
Second, if markets have high volatility swings. The main reason for this is if the market is in a strong trend, this gives us staying power against any wrong direction movement in the market.
This is also the first leg of the “Free Trade” strategy.
