In this article, we will discuss
When the market enters a bullish phase, it is quite common for investors to get carried away. However, excessive optimism can often lead to trend reversals, which can be detrimental to their investment objectives. Thus, under such market conditions, experts always recommend using bullish options strategies to generate returns while limiting the chances of loss.
Keep reading to learn more!
What are Bullish Options Strategies?
As the name suggests, bullish options strategies are trading techniques which investors use when they predict that the market is going to enter a bullish phase. It involves analysing the support and resistance levels of assets and selecting the best possible strike price.
These techniques also act as a risk management measure in case of sudden trend reversals, protecting investors from heavy losses.
Types of Bullish Options Strategies
There can be several types of bullish options strategies depending on how optimistic you are. Here are some of the most commonly used ones:
1. Bull Call Spread
A bull call spread is a strategy in which you need to buy a call option with a lower strike price and sell another call option with a higher strike. Both need to have the same date of expiry and underlying asset.
Your aim will be to generate returns from the difference in the premium amount which you paid and received. If the underlying asset’s value rises above the short call’s strike price, it will result in positive returns. However, if it falls below the long call’s strike, it results in a loss.
In this strategy, both profit and loss potential are limited.
2. Bull Put Spread
To implement this strategy, you need to buy a put option with a higher strike price and sell one with a lower strike. Just like the bull call spread, both options must have the same underlying asset as well as strike price.
You can calculate your returns from this strategy by subtracting the net premium paid from the received amount, along with the commission. Your chances of generating positive returns are high when the underlying asset’s share price crosses the short put’s strike price. On the other hand, you can calculate the maximum loss from the difference in premiums.
3. Bull Ratio Spread
A bull ratio spread is an extended version of a bull call spread offering a high degree of flexibility. To apply this tactic, you need to buy one at-the-money (ATM) call option and sell two out-of-the-money (OTM) calls.
Now, the ratio at which you buy and sell these options is totally up to you. Keeping the ratio high will help you offset the costs of the call options which you buy. In this case, you can get good returns when the underlying asset’s value is equal to the strike price upon expiry. The call options that you sold will expire worthlessly.
Now, if the underlying asset’s value remains stable or depreciates, all your call options will expire worthlessly, resulting in a loss. However, if the premium earned by selling your calls is higher than the amount spent on buying them, this strategy will help to generate a positive return even if the security’s price falls or remains stable.
4. Bull Butterfly Spread
Bull butterfly spread is another option trading strategy with limited profit and loss-making potential. You can execute this strategy by using either call options (Bull butterfly spread) or put options (Bull put butterfly spread).
It involves selling two call/put options, with a strike price which you expect the underlying asset’s value to reach upon expiry. You also need to purchase one call/put, which is higher than your target strike and another, which is lower.
You can get substantial returns from this strategy when the underlying asset’s value is equal to the middle strike price upon expiration. In contrast, the maximum loss that you may incur will be equal to the net premium amount paid.
Furthermore, there are two breakeven points – one at a lower strike price + premium paid and another at a higher strike price – premium paid.
5. Short Bull Ratio Spread
A short bull ratio spread is a strategy which can provide you with unlimited profit in a bull market. It involves buying 3 ATM call options and selling off one in-the-money (ITM) call. Also, all of them should have the same underlying security as well as date of expiry.
This strategy can generate returns as long as the underlying asset’s value keeps on rising. Your maximum loss will be equal to the difference between the long calls’ total premiums and the short calls’ total premiums.
6. Bull Call Ladder Spread
To execute a bull call ladder spread, you need to buy an ATM or ITM call and sell two OTM calls with different strike values. You can book maximum profits if the underlying asset’s value upon expiry is between the higher and middle strike values.
However, loss potential is unlimited in case the asset price moves beyond the breakeven point. This is a neutral bullish strategy and should only be used when you notice slight bullish signals in the market, along with low volatility.
7. Bull Condor Spread
This is one of the most advanced bullish options strategies, which can provide substantial profits but with high risk. It involves choosing a price range in which the underlying asset may stay upon expiration. Then, you need to sell one call with a high strike and another with a low strike price and purchase a call with a high strike price and another with a low strike.
You can get returns from this strategy if the underlying security’s value stays within the price range upon expiry. Whereas, your maximum loss is limited to the capital you invested.
8. Call Ratio Backspread
You can use this strategy when you anticipate a significant rise in the underlying asset’s value. It involves buying calls (either ATM/ITM) and selling OTM call options with different strikes but with the same expiry dates at the ratios 1:3, 2:3 or 1:2. Profit potential is unlimited in this case as long as the underlying asset’s value crosses the purchased call options’ strike prices.
Your risk is limited to the amount of premium paid.
9. Synthetic Call
You can use a synthetic call when you are concerned about a stock’s short-term price fluctuations. To implement this strategy, you simply need to buy an ATM put option for the stock which you are already holding.
By doing so, you can keep on receiving the benefits of holding the stocks, while the put acts like an insurance policy against sudden price reversals.
10. Poor Man’s Covered Call
To execute a poor man’s covered call, you need to purchase a long ITM call option and sell a short OTM call option. In case the underlying asset’s value increases, you will get positive returns from the long call. However, if there is just a slight upward movement in asset value, both long and short call options may be profitable.
Conclusion
These are some of the options strategies which you consider using in a bullish market. Each has its own risk and reward potential, enabling you to select one as per your risk tolerance level. Now, keeping tabs on market movements is also essential while using such strategies. It helps you choose the right time for implementation and increases your chances of booking gains.
In this regard, trading via the New-Gen Samco app can be a game-changer. You can watch the market, execute trades and track your investments all from one platform. Furthermore, you can get personalised insights from your past trades and learn how to improve your profitability in future trades.
So, download the Samco app today and take your trading to the next level!
Frequently Asked Questions
Q1. When is the best time to apply bullish trading strategies?
Ans. The best time for applying bullish trading strategies is when you anticipate a price rise in your target asset. However, you must estimate how much the price may rise, along with its timeframe
Q2. What are long calls?
Ans. Long calls are standard call options which give you the right but not the obligation to buy a stock at a predetermined price. It is one of the easiest bullish options strategies.
Q3. What is a short call?
Ans. A short call entails selling a call option when you anticipate a fall in your target asset’s value. It has limited profit potential and high risk in case the underlying value crosses the strike price upon expiry.
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