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.
- 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
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.