Best Option Trading Strategies in Bullish Market ConditionLast Updated Date: Aug 30, 2023
Know everything about Bullish Option Trading Strategies here.
Every retail trader knows the value options trading holds with itself. The uncertainty of earning exponential returns with minimal investment makes options trading one of the most sought-after trading forms.
Options are a form of derivatives that derive their value from an underlying security or index. If your analysis says that the market is bullish, then to earn profits buy calls like most retail traders do. Never ignore the fact that the market is uncertain.
The factor of risk is subject to management but not revoking. Thus, it is always advisable to hedge yourself in such situations.
So, even if the market does not go in your favor, you can still cut short your risk, which is the most crucial thing to do.
Instead of only buying calls, applying strategies will help you hedge yourself in unfavorable market conditions and provide you other benefits too.
What is Bullish Options Strategies & its functions?
Buying calls requires analysis of the market conditions first, and then placement of your orders. Thus, it is a strategy too, but with some unavoidable flaws.
If you are a regular trader, you must be aware of the fact that a call/put has an expiry date. This is either monthly or weekly, depending upon the type of contract you choose.
As your contract approaches the expiry date, the risk associated keeps on increasing. This is because your call becomes profitable only when the price of the underlying security rises substantially. This by no means suggests that one should not buy calls.
Applying the right techniques and strategies along with the calls can help you hedge yourself. We will discuss several bullish options strategies in later sections.
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Advantages of Bullish Option Trading Strategies
One of the most common mistakes retail traders do is to buy calls in the middle of a bull trend. Due to this they are not able to analyze the point from where the trend reverses.
If you have observed that the market trend is bullish, but you are stuck in the middle of the trend, you must choose to go for strategies instead of simply buying calls.
This might limit your profits, but it will help you protect yourself from any unexpected fall in the security price.
Not doing this can manifold your risks, and in some cases, you might end up losing your entire capital too!
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Disadvantages of Bullish Option Trading Strategies
As mentioned above, the risk in stock market is only subject to control and management. One cannot completely revoke the risk factor. Thus, bullish strategies might help to reduce the risk, but it has its own downsides too.
One major negative of a bullish strategy is that it neglects the factor of unlimited and uncertain profits offered by calls. In case of bullish strategy, your profits are usually bound by a specific range, so is the risk involved.
The fact to note is that the amount of commission paid to the broker in case of strategy is usually higher than in case of calls because you have to place multiple orders in this case. On the other hand, buying calls requires you to place a single order.
Another characteristic of a bullish option strategy is the time and effort it requires. Learning strategies can be fun for the people who are enthusiastic about the markets.
But most retail traders do not wish to invest a lot of time learning the strategies. They simply go with calls or puts.
However, once you gain expertise and apply the strategy rationally, you will earn profits consistently. They will also have the edge over those who make profits based on their luck.
We have listed a few bullish options strategies, and having a glimpse of each one of them will help you analyze the one suited for you.
You can always create your strategy by considering all the parameters.
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List of all Bullish Option Trading Strategies
Here you will find snapshot of all Option Trading Strategies used in Bull Market –
This is usually the first strategy a trader uses when he or she steps into the futures and options segment. The simplicity involved in long call makes it one of the most commonly used strategies by fresh traders and professionals.
If you have a bullish view of security and believe the price will change significantly, you can earn profits by taking long calls.
It can also be an alternative to buying security because all you need to pay is the premium, which costs significantly less than the security.
Thus, the risk involved is also lower. After all, even if the price of the security crashes, all you lose is the premium you paid. It is advisable for beginners as the level of complexity is low.
The short put is nothing but selling the puts for underlying security and agreeing to buy the same security in the future at a fixed price.
In this case, you make profits when the security price goes up. But if it goes down, you end up facing a loss as you will have to buy the security.
There are two cases in which profit are possible; if the price goes up, the trade becomes favorable, and the trader is profitable.
On the other hand, you can also make a profit with the puts you sold even when the security price does not change.
This is because, with time, the value of contract decreases. Since you have sold it at a greater price, fall in value can help you earn profits.
It is important to note that the trader exposes himself to a lot of risks. Thus, it is not recommended for those who are new in the markets.
Bull Call Spread
This is a cheaper alternative to a long call, and thus it is suitable for the beginners too.
In a bull call spread, the trader buys an in the money call with a strike price at which the security is currently trading in the market.
And, at the same time, write out of the money call for a strike price which is the target for the underlying security.
If the security price goes up significantly, the trader ends up earning profits for the call he owns and for the puts written off earlier.
If the price goes up slightly, the call might or might not increase. But it is possible to book profits as the value of puts written off will eventually become 0.
The trader faces a loss only when the price of security does not change at all. This is because the value of the call and put will become 0 over time, but the profit made by writing puts won’t be able to cover the loss caused by buying calls.
Bull Put Spread
Unlike the bull call spread, a bull put spread strategy requires expertise and is not suitable for beginners.
The execution is not complicated and requires only two transactions. However, you must be aware of the market conditions and choose the strike prices after a thorough analysis.
A bull put strategy is suitable when there is an expectation that underlying security price will increase but not by a significant margin.
A trader can create a bull put spread by writing the puts of a higher strike price and buying puts for a lower price.
These are generally out of the money puts. There are majorly two scenarios in which the traders can book profits.
The Security Price Rises: In this case, the puts you have written become worthless, leading to profits, but the puts you bought will also lose their value and cause you a loss. However, the net positions stand profitable as the puts written were of a higher amount.
The Price of Security Does Not Change: In this case too, both the puts will eventually become worthless, but the net position stands profitable. This happens because the puts written were of higher value than the puts bought.
Bull Call Ladder Spread
This complex options trading strategy is not meant for beginners. This trading strategy helps to book high profits in those securities whose prices show an increasing trend.
The bull call ladder spread strategy is a more complicated alternative of bull call spread since, there are three transactions involved in this.
The three transactions used are:
- Buying calls with an expectation to profit from the increase in the price of the security.
- The other two are writing calls, at different strikes, done with the primary objective of setting off the costs of buying the calls.
The main reason because of which traders use this strategy is that it reduces the upfront cost of taking the position, without affecting the profits situation.
However, this strategy’s most significant disadvantage is that one can lose money if the security price rises unexpectedly higher. Also, the margin requirements are high, and hence, beginners try to avoid using this trading strategy.
Bull Condor Spread
This is again, a strategy not meant for beginner options traders. There are four complex transactions involved in this to create a debit spread.
It enables traders to earn good profit margins when the price rises within a predicted range. If the security performs as per the expectations and increases within the forecasted range, the bull condor spread strategy can lead to high returns with a low investment.
To create the spread, both buying and writing options are important. There can be call bull condor spread, or put bull condor spread based on the nature of transactions.
Those who prefer simplicity and ease of transactions over high returns can perform all the four transactions simultaneously. In contrast, the latter category of traders can use the legging option.
Bull Butterfly Spread
The traders use this strategy when they have a pretty good idea of how much and up to what price the security can rise to.
With a relatively low upfront cost and three simple transactions, the bull butterfly spread strategy is highly popular. The three transactions used are:
- Buy calls
- Write calls
- Buy calls
The potential for profits is low, as the risks involved are limited. This is an ideal strategy for those traders who do not have a high amount of capital.
However, beginners should try and refrain from using the bull butterfly spread strategy. This is because it requires a high level of accuracy and specific predictions about price movements.
Short Bull Ratio Spread
This option trading strategy provides the trader with the potential to make unlimited profits. It is very similar to buying long calls. However, in this, there are two transactions involved, with a mild level of complexity.
The short bull ratio spread trading strategy is ideally used in situations where the trader is confident about an increase in price but is still skeptical about losing money if the price falls. So, there is a scope of high profits in this strategy, but with a low upfront cost.
The maximum loss occurs in a situation wherein the concerned security price is equivalent to the strike of calls bought at the time of expiration.
To effectively utilize this strategy, buy cheaper options than the ones written. The idea is to maintain an appropriate ratio of bought to the ones written. The most commonly used ratio is 3:1.
Bull Ratio Spread
This is one of the highly complicated yet flexible options trading strategies. The bull ratio spread can help the traders earn a profit, even if the price of the underlying security falls.
Being a cost-effective strategy, it is quite popular. This strategy requires the writing of more calls than buying, hence the complexity.
The ratio which is to be maintained is what that ultimately leads to profits. If the ratio results in a debit spread, then there are losses, whereas the traders can book profits in case of a credit spread. The trader adjusts the ratio as per his expectation from a specific trade.
In this strategy, even though the number of transactions involved is just two, the transactions are so complex to understand.
The optimum ratio is the main play here and striking that ratio can become confusing and cumbersome, especially for beginners.
Bullish Option Trading Strategies: Conclusion
It is a known fact that options trading involves higher exposure to risk that equity trading does. As discussed earlier, the stock market’s inherent factor of risk cannot be wholly revoked.
Applying the right strategies after thorough analysis can help you control the risk. Using strategies can sometimes limit your potential profits, but it helps cut your losses short, which is probably the most important aspect to control in the markets.
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