When to Use Bullish Options Strategies

W hen you think the price of a stock or other asset is going to rise, you want a make a move that sets you up to gain a profit. That’s where bullish options strategies come in. You can choose from a variety of different bullish options strategies depending on how bullish you are and how much you want to minimize risk.

Key Takeaways:

  • You can use bullish options strategies when you expect the underlying asset of a trade to rise.
  • Buying calls is one of the most straightforward possibilities to employ a bullish options trading strategy.
  • Various other bullish options strategies also exist, ranging in complexity and how they limit profit and protect you from risk.

What Are Bullish Options Strategies?

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Bullish options strategies are strategies you can use when you think the price of an underlying security or other asset is going to rise. While the most straightforward way to use options to profit from rising prices is to buy calls, this isn’t the only bullish options strategy available to you. Other strategies work better when you want to make a return from more moderate upwards price movements or better protect yourself if the underlying security does not move or even falls in price.

You’ll need to assess how high you think the price of a security can go as well as the timeframe in which you think the rally will happen. These assessments will help you choose the best trading strategy for the situation.

You may choose different strategies depending on whether you are very bullish, moderately bullish, or mildly bullish.

  • Very bullish: The simple call buying strategy is the most bullish options strategy out there. Many beginning options traders use this strategy.
  • Moderately bullish: Most stocks don’t typically gain in leaps and bounds in a short time. You can operate as a moderately bullish options trader, setting up a target price for a bull run. Then, you can use bull spreads to reduce risk. Bull spread strategies do cap your maximum profit, but they also typically cost less to use.
  • Mildly bullish: Mildly bullish options strategies make money as long as the price of the underlying stock doesn’t go down on the expiration date of your option, and they usually also provide a small downside protection. One example of a mildly bullish strategy is writing an out-of-the-money covered call.

Why Use Bullish Options Strategies? Buying Simple Calls vs. Other Strategies

All in all, you’ll use bullish options strategies when you expect the underlying asset to rise. The simplest method for making profits from rising prices is to buy calls.

Buying Calls

Simple call purchases can be a viable trading strategy in certain circumstances, but there are downsides to this move as well. Disadvantages of buying calls include:

  • You risk your contract expiring worthless and generating no return, which would mean you lose your full investment.
  • You’re subject to the negative effects of time decay.
  • You usually need the underlying security’s price to rise fairly significantly to make a profit.

These disadvantages shouldn’t discourage you from buying calls when the time is right. After all, you’re taking some kind of risk with any form of investment. The key is understanding when it’s better to avoid some of these disadvantages by choosing an alternative bullish options strategy instead.

Buying calls also comes with a significant advantage. When you buy calls, theoretically, your profits are unlimited. This is because you keep profiting the more the underlying security’s price rises.

Other Bullish Options Strategies

A wide range of bullish options strategies exist, each with its own set of unique characteristics and likelihood of getting you success depending on your goals for a situation. For instance, you can write calls with a higher strike in order to reduce the cost of buying calls; this move might also help you cut down the negative effects time decay has on your position. You can also do this by using a strategy that calls for writing puts.

You’ll find all sorts of strategies and combinations of strategies to use at different times. You can also create credit spreads to get a return on an upfront payment instead of creating debit spreads that have an upfront cost.

All in all, bullish options strategies allow you to enter a position that will profit from an increase in the underlying security’s price. Many strategies let you retain control over other factors, for example, the level of risk you need to take or the amount of capital the strategy requires.

You do make a sacrifice when you go with bullish trading strategies other than buying calls. With most other strategies, you limit the amount of profit you can make. That said, most options trades are based on short-term price movements. Likewise, most financial instruments don’t usually move in huge amounts. That means this sacrifice isn’t always such a big drawback compared to buying calls when you’re choosing which bullish options strategy to use.

Other types of bullish options strategies can also be more complicated than buying calls. Buying calls when you think a financial instrument will rise in price is fairly simple; you can benefit from the price increase with a straightforward transaction. Trying to maximize potential prices and/or limit potential losses can complicate your strategy more than necessary. You’ll also usually end up paying higher commissions with other bullish options strategies, as many other strategies require you to make multiple transactions when creating spreads.

Overall, the more you know about different bullish options strategies, the more likely you’ll have consistent success when trading options. Knowing which trading strategy to use and when to use it goes a long way when you’re trading.

Commonly Used Bullish Options Strategies

A variety of bullish options trading strategies exist. Commonly used strategies include:

  • Long Call: The long call is a single position strategy. You only need one transaction to use this strategy. There’s an upfront cost, but beginners can use it.
  • Short Put: You need to make only one transaction for a short put. A short put creates an upfront credit.
  • Bull Call Spread: This is a fairly simple strategy that beginners can also use. You’ll use two transactions to make a debit spread.
  • Bull Put Spread: While this strategy is relatively straightforward, it does require a higher level of trading. You’ll create a credit spread using two transactions.
  • Bull Ratio Spread: This complex strategy necessitates two transactions. A bull ratio spread can credit a credit spread or a debit spread. The type of spread you create depends on the ratio of the options you buy to the options you write.
  • Short Bull Ratio Spread: This trading strategy is also relatively complex. It involves two transactions to create a credit spread.
  • Bull Butterfly Spread: You can use two different kinds of bull butterfly spreads. Both call bull butterfly spreads and put bull butterfly spreads exist. Either way, you’re involved in a complicated trading strategy that requires three transactions to create a debit spread.
  • Bull Condor Spread: There are also two kinds of bull condor spreads, with both call bull condor spreads and put bull condor spreads possible. You create a debit spread with this strategy as well. A bull condor spread calls for four transactions.
  • Bull Call Ladder Spread: This is another complex strategy that requires three transactions. A bull call ladder spread creates a debit spread.
  • Covered Call: A covered call is a strategy to generate income, initiated when you buy a stock and sell a call option at the same time. Alternatively, you can use a covered call when you hold a stock and want to earn income from the investment. You typically sell a call option that is out of the money, and the option won’t be exercised unless the stock price goes above the strike price.
  • Call Backspread: The reverse of a call ratio spread, a call backspread requires you to sell options at lower strikes and buy higher numbers of options at higher strikes of that same underlying stock. A call backspread involves unlimited profit and limited risk.
  • Stock Repair Strategy: This alternative strategy is used to recover from the loss that a stock suffers when it falls in price. You can use this to recover losses with only a moderate rise in the underlying stock’s price.
  • Covered Combination: You can use this options strategy if you’re moderately bullish on the financial instrument you’re trading. A covered combination requires you to hold shares of a stock (in a long stock position) while, at the same time, you also hold a short strangle or short straddle options position. A strangle combines an out-of-the-money put with an out-of-the-money call, while a straddle uses an at-the-money put with an at-the-money call. You use short option positions with a covered combination.

B ullish options strategies let you make a move when you think the price of an underlying asset will rise. Strategies range in complexity, so there’s something you can get started using, no matter your trading experience.

Author:Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

How to Do an Option Premium Calculation

Purchasing an option on the stock market gives you the right to buy or sell shares of a specific asset at a specific price by a certain date. The price at which you can buy the shares is called the strike price, while the price you pay for the option itself is the premium price.

An option is profitable, or ‘in the money,’ when the asset’s market value exceeds the strike price for a put option and vice versa for a call option. Options that are not in the money, including both at-the-money and out-of-the-money options, are worthless. Review these steps to complete the option premium calculation and learn about why this metric is so important for options traders.

Steps to Calculate an Option Premium:

  • Understand the Option Premium Calculation: Also called an option’s extrinsic value, the premium is the price you pay for a stock or asset option.
  • Find the Option’s Intrinsic Value: Determine the amount by which you could profit from exercising the option by subtracting the strike price from the underlying asset price.
  • Calculate the Option’s Time Value: This metric indicates the amount over the premium a buyer would be willing to pay for the option.
  • Add Intrinsic Value to Time Value: The sum of these two numbers equals an option’s premium. Some options have a higher adjusted premium because of their volatility.
  • Consider the Role of Delta: This metric shows how an option premium changes in relation to the underlying asset price changes.

Understand the Option Premium Calculation

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Traders who invest in options must understand the value of an option premium, sometimes called the extrinsic value of the option. When you pay a premium for a call option, you can buy the stock at the strike price before the expiration date, while a put option lets you sell a stock at the strike price by the expiration date.

When you buy an option, you must pay the nonrefundable upfront premium. You can’t get the premium back if you decide not to exercise the option.

An option quote represents a per-share premium price. Generally, these options commit you to buy or sell 100 shares of the stock in question if you decide to exercise the option. For example, a 25-cent option premium would actually cost $25 for the option to trade 100 shares.

Option premiums also serve as an income stream for investors who sell put and call options. Any price for an option that appears on an exchange like the Chicago Board Options Exchange is considered a premium cost because it does not have an inherent value.

Factors that affect an option’s premium price include:

  • The perceived volatility of the asset.
  • The remaining life of the option.
  • Whether the option is currently out of the money, in the money, or at the money. The more an option is in the money, the higher its premium price.
  • The price of the underlying asset, which pushes the premium price in the same direction for a call option and in the opposite direction for a put option.

Read on to get the formula for how to calculate an option premium. Looking at an option premium calculation example can help you better understand this fundamental trading concept.

Find the Option’s Intrinsic Value

The current market value of an option is known as its intrinsic value. This measures the amount by which an option is in the money, which means it will produce a profit.

An out-of-the-money option, on the other hand, is worthless, with an intrinsic value of $0. You would not incur a loss because you would simply let the option expire without taking action.

Let’s say you bought a $35 call option on a stock that has a current market value of $50. That means the option is $15 in the money. You would receive an instant profit of $15 per share if you exercise your option since you can buy each share worth $50 for $35.

In this example, $15 is the intrinsic value of the stock. To find the intrinsic value for an in-the-money option, subtract the strike price from the current trading price.

In summary, calculate the intrinsic value of an in-the-money call option by subtracting the strike price from the price of the underlying asset. For an in-the-money put option, subtract the price of the underlying asset from the strike price.

Calculate the Option’s Time Value

If you can find a trader to buy your option at a cost above its intrinsic value, that amount is the option’s time value. The trader is hoping that the option will gain even more value before it expires. For this reason, an option with months until expiration will have a higher time value than an option with weeks or just days left to go. An option within hours of expiration has little to no time value.

Let’s return to the example above, where we calculated an intrinsic value of $15. The stock is currently trading at $50, and we have a $35 call option. If the current premium price of the option is $17, the time value would be $2. Subtract the intrinsic value from the current option premium price to get the time value.

If the option is not in the money, the time value equals the premium price since the intrinsic value is $0.

Add Intrinsic Value to Time Value

The option premium formula is simply the sum of the option’s intrinsic value and its time value. For at-the-money and out-of-the-money options, the time value is always equal to the option premium price.

If you calculate the time value and intrinsic value of an option, you’ll have a better understanding of whether that option is actually worth your money. The intrinsic value represents the value of the option if you exercised it right now, while the time value predicts the possibility that the option will increase in value before time runs out.

These concepts are inherent in realizing an option’s potential risks and profits. For example, an option that is out of the money or at the money is associated with a higher risk of losing all value by the expiration date than with an in-the-money option. On the flip side, at-the-money and out-of-the-money options also carry the chance of becoming in the money before expiration, which would result in larger profit percentage gains than with an option that starts in the money.

Consider the Role of Delta

Delta describes the amount an option premium changes with every one-point change in the underlying security. A call option can have a delta ranging from 0 to 1 and moves in the same direction as the underlying asset. A put option can have a delta between -1 and 0 and moves in the opposite direction of the underlying asset.

Let’s look at an example to illustrate how the delta of an option premium works. You have a call option on a stock that’s currently trading at $50. The premium is $10 and has a delta of 0.5, which can also be expressed as 50%. That means for every $1 the stock moves, the option premium moves by 50 cents in the same direction. In this example, if the price of the underlying stock rises to $52, the premium would rise to $11.

Now let’s pretend you have a $10 put option on the same stock with a 0.75 delta. For every $1 the underlying stock moves, the premium moves 75 cents in the opposite direction. If the stock price drops to $45, the option premium price would rise to $13.75.

The higher the premium price of an option, the higher the potential value that option has. Reviewing the delta of an option can help inform your strategy. As the delta of an option premium approaches 1 for a call option or -1 for a put option, the option becomes further in the money and grows more valuable.

Now that you know how to calculate an option premium, you can harness the value of this knowledge as you become acclimated to the complex yet rewarding world of options trading.

Author:Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

How Do Option Calls Work?

A n option is a type of financial contract called a derivative. A derivative varies in price based on the price changes of an underlying stock, security, or asset. Unlike stocks, options do not represent a portion of equity in a company. However, because you can get out of your options position at any time, they carry less risk than less liquid assets like stocks and bonds.

Short-term options expire within months, while long-term options last longer than a year and are often called LEAPS (Long-Term Equity Anticipation Securities). Like other investments, options are available for purchase through your trading account with a brokerage firm. Learning how options work gives you a powerful tool that can potentially increase profits and shield your portfolio against risk.

Key Points:

  • Derivative assets such as options vary in price based on the price changes of another financial instrument such as a stock, known as the underlying asset.
  • Options create the potential for profit with limited risk compared to the risk associated with stocks, bonds, and other less-liquid securities.
  • With a call option, you have the right to buy the underlying asset at a set price, called the strike price, even if its market value rises above that price.
  • You pay a premium price per share for a call option, and most options consist of 100 shares.
  • The counterpart to a call option is a put option, which gives you the right to sell shares of a stock at a certain price even if its market price drops.
  • Some of the benefits of option calls include risk management, the ability to create profit and income, and limited risk.
  • The further an asset is ‘in the money,’ the more likely it is to be profitable by its expiration date.
  • Some of the common strategies using call options include covered calls, stock speculation, call spreads, and tax management.

What Are Option Calls?

How do option calls work? When you buy a call option, you are buying the right to purchase a financial instrument such as a commodity, bond, or stock at some point in the future. The option establishes a set price for the purchase, called the strike price, and an expiration date by which you must exercise the option to buy the shares. If you decide not to do so, the option expires. You would use a call option if you expect the underlying share price to rise before the expiration date. You can exercise an American-style option anytime before its expiration date, while a European-style option can be exercised only on the expiration date.

The cost of an option is called its premium price, and it’s quoted by share. Usually, an option consists of 100 shares, so the total premium for a $2 option would be $200. If you let your call option expire without exercising the right to buy those shares, you lose only the premium you paid. The person who sells you the option is in the so-called short position, while you hold the long position.

To understand more about how call options work, let’s look at an example of an option call. Pretend you buy a $200 stock option for 100 shares as described above. The strike price of your option is $80, and shares of the stock are trading at $90 on the expiration date. If you exercise your call option, you can buy the shares at $80 and make an instant profit of $10 per share ($1,000 total) if you turn around and sell them for $90 on the open market. On the other hand, if the share price drops below the strike price you can let your option expire and lose only the $100 premium.

An option call that gives you the right to sell a certain number of shares at a certain price is called a put option. You place a put option if you expect the underlying asset to drop in value. If this occurs, you can sell your shares at the higher strike price.

Benefits of Option Calls

Traders appreciate option calls because they provide the opportunity to profit regardless of current market conditions (bear, bull, or flat). If your portfolio is stacked with steady, high-performing blue-chip stocks, you can sell options on your holdings to generate an additional income stream from the premiums. In the right circumstances, some call options create a return of up to 300% on your investment in a single day. That means if you spend $200 on a call option, you could earn as much as $600 in profit.

Traders say that a call option is ‘in the money’ if it is profitable. This occurs when the price of the underlying asset exceeds the strike price of the call. When the underlying asset price meets the strike price, the asset is considered at-the-money. When the strike price is higher than the price of the underlying asset, the asset is out-of-the-money. An option has no value if it is at-the-money or out-of-the-money at expiration.

Strategies Using Option Calls

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The long call option strategy is the most basic way to get started with options. You simply buy a call option on an asset you think will rise over time. If it does, you buy it at the low strike price and resell it at the higher market value. If it drops, you let the option expire and lose only your premium price.

You’re probably curious about how option calls work when you combine them with other strategies. One such strategy is a covered call, designed to create a stream of income using call options. With a covered call, you sell a call option to another investor for an underlying asset you already own. You collect the premium price for the asset as a profit and hope that the option expires without value. If the price of the asset exceeds the call price, however, the person who bought the option can exercise it and buy your shares at the lower strike price.

Some traders use options contracts to speculate on a stock without a large initial investment. As long as you can afford the premium price, you can potentially realize significant gains on the price rise of a stock you couldn’t otherwise manage to purchase. With this strategy, called speculation, you limit your risk only to the amount you pay for the option premium.

You can also use a call spread, in which you sell and buy different call options at the same time. While this strategy limits your loss, it also caps your potential profit. However, it can also protect your premium by hedging the various options against one another.

With a bull call spread, you buy an option call for with a certain expiration date and strike price, then sell an option call for the same number of shares with the same expiration date and a higher strike price. Selling the calls offsets the cost of this transaction, but you limit your profit to the strike price on the second call.

For potentially exponential profits with limited initial cost, go for the long call butterfly strategy. For this technique, set a target price for the stock and then sell two call options that have your target as the strike price. Sell a third call option at a strike price above your target, then buy a call option at a strike price below your target. If the underlying asset hits the target price, you can let all the sold options expire while generating profits from the call option you purchased.

Tax management is another possible advantage of using an option call. For example, a trader can update portfolio allocations by adding options instead of buying or selling the actual holdings. This reduces the investor’s risk exposure to a declining security without incurring the tax associated with selling it outright.

Now that you know the answer to the question of how do call and put options work, you’re one step closer to implementing these tactics in your own trading strategy.

Author:Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.