Bullish Options Trading Strategies – How to Use Options in Bullish Market?

Understanding Bullish Options Trading Strategies: It is a widely understood myth that trading Option is a “Hit or Miss” game. Either you make it big or lose it all. But this myth is about to be questioned. And it is a general tendency to buy more than to sell.

When the Bull run happens, people tend to express their views by buying options without understanding the technicalities associated with it. Even though the market goes up, they tend to not make any profit and lose all the premium which they paid to buy the option.

“Options are Derivative product which derives their value from the value of the Underlying Asset. It gives the holder the option to buy/see the underlying asset on or before the expiry”

Today, through this write up we will try and discuss the Option Trading Strategies for Bullish Market, whereby the risk is limited and still has the potential to earn decent returns. Without wasting any time we will try and understand Bullish Options Trading strategies:

Bull Call Spread – Bullish Options Trading Strategies

Let us try and understand the premise for Bull Call Spread. Bull Call Spread is a Two-legged strategy i.e., there are two options positions running simultaneously. In this strategy, there is an assumption of strength in the market and the next level of resistance is likely to be tested by the market.

Implementation of Bull Call Spread

To implement this strategy, the trader has to Buy One ATM call option and Sell One OTM call option. That is:

• Buy One At the Money Call option
• Sell/write one Out of money Call option

The following are the assumptions under this strategy:

• All the strikes belong to the same underlying
• Both the options have the same expiry
• Both the legs have the same number of contracts

Example of the Bull Call Spread Strategy

Assume, the Spot price of Nifty is 9310. The following are the Option legs traded:

• An At the Money call option bought = 9300, Premium paid =75 units
• An Out of Money call option sold = 9400. Premium received = 20 units
• The net transfer of Option Premium units = 20-75 = -55 units.

In general, at the initiation of this trade, the P/L always shows negative as one has to buy In The Money option and sell an Out Of Money option. Now let us understand the functioning of this strategy at various levels of expiry:

Case1: If the Market expires at 9200

Here, the Net Payoff using this strategy is -55 units (-75+20)

Case 2: If the Market expires at 9300

The Net Payoff using this strategy is -55 units (-75+20)

Case 3: If the Market expires at 9400,

The Net Payoff using this strategy is 45units (25+20)

Case 4: If the Market expires at 9500, then:

The Net Payoff using this strategy is 45units (125-80)

What do we understand from the calculation above?

From the above example, we can notice that irrespective of the weakness in the market, the maximum loss which one makes from this strategy is to the tune of 55 units.

Even if the market expires very strong for this particular strategy, the maximum profit which one can make from this strategy is 45 units.

The Breakeven point for Bull Call Spread Strategy

The Breakeven Point (BEP) for this strategy is the point when the spot price equals the summation of At the money strike price and the maximum loss (Net debit) in this strategy.

BEP = Strike price of ATM + Maximum loss = 9300 + 55 = 9355.

That is, when the spot price reaches 9355, this strategy reaches its Breakeven point.

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Bull Put Spread – Bullish Options Trading Strategies

Bull Put Spread strategy also runs on the same assumption as the Bull Call Spread. There are two legs in this strategy and there is an expectation of Strenght in the market. But unlike the Bull call strategy, In the Bull Put strategy, we have two legs of Put options positions running simultaneously.

Now, you must be wondering as to one does one expresses a Bullish view using the Put Option. The logic here is to pocket the premium by writing one In the Money Put Options and buy One Out of money Option.

Implementation of Bull Put Spread

To implement this strategy, the trader has to Buy One ATM call option and Sell One OTM call option. That is:

• Buy One Out of Money Put option and
• Sell/write One In the money call option

The following are the assumptions under the Bull Put spread strategy:

• All the strikes belong to the same underlying
• Both the options have the same expiry
• Both the legs have the same number of contracts

Example of the Bull Put Spread Strategy

Assume, the Spot price of Nifty is 9290. The Following are the Option legs traded:

• An Out the Money Put option bought = 9200 PE, Premium paid =45
• An In of Money call option sold = 9300 PE. Premium received = 125 units
• The net receipt of Option Premium units = 125-45 = 80 units.

In general at the initiation of this trade, the P/L always positive as one has to buy the OTM option and sell the ITM option. Now let us understand the functioning of this strategy at various levels of expiry:

Case 1: If the market expires at 9100,

The net payoff using this strategy = – 20 units (55-75)

Case 2: If the market expires at 9200,

The net payoff using this strategy = – 20 units (-45+25)

Case 3: If the market expires at 9300,

The net payoff using this strategy = 80 units (-45+125)

Case 4: If the market expires at 9400,

The net payoff using this strategy = 80 units (-45+125)

What do we understand from the calculation above?

From the above example, we can notice that irrespective of the weakness to any extent in the market, the maximum loss which one makes in this strategy is 20 units. And even if the market expires very strong, the maximum profit which one can make in this strategy is 80 units

The breakeven point for Bull Put strategy

The Breakeven Point (BEP) for this strategy is the point when the spot price equals the difference of At the money strike price and the maximum profit (Net credit) in this strategy.

BEP = Strike price of ATM + Maximum loss = 9300 – 80 = 9220.

That is, when the spot price reaches 9220, this strategy reaches its Breakeven point.

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Closing Thoughts

In this article, we looked into Bullish Options Trading Strategies. From the detailed discussion above it can be seen that Options trading need not be a game of “Hit or Miss”. Various trading strategies can be formulated whereby one can earn sustainable returns and not exposed to very high risks.

That’s all for this post. We hope you have learned something new from our article on Bullish Options Trading Strategies. Let us know your views in the comment section below. Happy Investing and Trading!