Taking The Bull By The Horn: Bullish Options Strategies
Traders often get carried when the market is rallying. Their over enthusiasm pushes the market higher until it reaches a point where the trend reverses. If you find yourself in the middle of a bullish run, as an experienced trader, you must have bullish options strategies to optimise your gain and avoid the high risk of loss from sudden trend changes. However, there are how and when to adopt a bullish strategy, which we have discussed in this article. It is dedicated to understanding options strategies for the bullish market, their importance, and how these can help you in wrestling the bull.
What Is A Bullish Options Trading Strategy?
Bullish options strategies are policies adopted by traders when they expect an asset price to rise. Buying call options is a simple policy to capitalise on the rising market, but doing so without covering your position for any unexpected price fall will increase your risks manifold. Moreover, it is also not a smart policy to adopt while the market is only moderately bullish. Instead, traders enter a bull call spread strategy.
A bull call spread is a trading strategy that traders adopt when price rise is moderate in the market. It uses two call options to create a range, one with a lower strike price and another with a higher strike price. This strategy may limit your profit, but it also safeguards you from incurring losses.
Traders can buy a simple call option to benefit from rising stock prices against a premium. The premium is calculated based on the current price of the security and the strike price. If both the current price and strike price are close to each other in value, the premium will be high. When the price rise, the buyer can execute his rights to buy stocks at the strike price. But if in case the stock price falls or remains unchanged, he can minimise his losses by only losing the premium value of the option.
It might sound a simple strategy, but there is a catch. When the premium price is higher, it might offset the gain from the stock price rise. Besides, you will also have to pay brokerage to the agent, and it will also add to the cost of the spread. Unless, the stock price rises significantly high, above the break-even point, buying a call option will limit your gain from the deal. The break-even of a stock price is equal to strike price plus the premium paid.
Mitigating Risks Using Bullish Call Spread
To cover risk exposure arising from buying a call option, traders enter into a spread. It uses two call options, one with a lower strike price and the other with a higher strike price. It helps in limiting losses but also caps the profit limit. So, why do traders use it? Entering a spread comes handy when the market is highly volatile. It safeguards the trader’s interest from sudden price changes.
Entering bullish options strategies involve the following steps.
- – Select an underlying asset which you believe will appreciate in the future
- – Buy a call option with a strike price that is higher than the current market price of the asset. That is, entering a long position
- – Simultaneously, enter short on a call option on the same asset with the same expiration date, or entering a short position
- – The premium earned on selling the call option will partially offset the premium paid for the long option
- – The trader has to pay the ‘cost of the strategy’, which is the net difference between the premium paid and received from initiating the spread
Types Of Bullish Option Strategies
Depending on how strong the bullish pull is, you can enter in different options strategies for a bullish market. For your benefit, we have produced a list of commonly used bullish options strategies below.
- Long call: Buying call option involves one transaction of buying a call option with an upfront premium. It marginalises your debt while allowing you the power of leveraging to optimise your profit. Often a good strategy to start with if you are a beginner.
- Short put: You agree to buy an underlying asset in a future date at a predetermined price. You benefit when asset price goes up. But this strategy also increases your risk volume since it involves purchasing the physical asset.
- Bull call spread: It involves buying a call and selling another with the same expiration date. The premium collected from selling a call option is used to offset the premium paid for the long call. It involves two transactions.
- Bull put spread: Bull put spread requires two transactions, but because of the high stakes involved, it is considered a complicated strategy and not recommended for beginners. It includes two transactions, buying one put and simultaneously selling another.
- Bull ration spread: It is a complex strategy but also offers more flexibility. Bull call spread involves buying and writing a call spread in a ratio. Usually, you sell more than what you buy. Using this strategy, you can profit even when asset price fails to rise as expected or worse, declines. But it is a strategy that suits more experienced traders and not recommended for new investors.
- Short bull ratio spread: Traders enter into a short bull ratio spread when they are confident that asset price will rise significantly but also at the same time want to cover for any loss in case the price falls. It involves two transactions of buying calls and writing calls with a lower strike rate for the same underlying and expiration date.
- Bull butterfly spread: Butterfly spreads are of two types call bull butterfly and put bull butterfly. It is a complex strategy involving three transactions and creates a debit spread.
- Bull condor spread: Two types of bull condor spreads are common – call and put. It creates a debit spread across four transactions. Traders use it to reduce the upfront cost and optimise profit when they are confident that security prices will rise to their level of expectation.
- Bull call ladder spread: It involves buying one call and writing two calls simultaneously, containing different strikes. Traders can also enter a leg by trading the call options at various times to maximise profit.
Using option strategies for a bullish market is a common practice, but it isn’t free from disadvantages. Entering a strategy to minimise your risk, also limits the profit margin you can gain from rising asset prices. Also, it involves the complications of choosing the right asset and strategy. And lastly, you also need to get concerned about the costs involved. Since most strategies include more than one trading, you eventually end up paying a higher commission percentage to the broker.