Bullish Option Strategies

Trading in options contracts is a good way to capitalise on the short-term price movements of an asset. Traders who purchase and sell options contracts often use a variety of different strategies to profit from the price movements. One of the different types of strategies that they use is bullish option strategies. 

As a prospective options trader, knowing what they are and the different kinds of bullish options strategies you can use can be very helpful. It can significantly increase the chances of attaining profitability. 

What are Bullish Options Strategies?

Bullish option strategies are used by traders who believe that the price of an underlying asset will increase in the future. These strategies typically involve using call options in different ways to profit from an expected increase in the underlying asset’s price. Although traders use bullish options strategies during market uptrends, some of them also use them even if the markets are neutral. 

What are the Different Types of Bullish Options Strategies?

Now that you’re aware of what bullish option strategies are, let’s look at the ones that are commonly used by traders. 

• Long Call 

One of the simplest bullish options strategies, the long call, involves purchasing a call option of an asset. If the price of the asset rises, the call option premium will also rise. Traders usually exit by selling the purchased call option once their desired profit target has been achieved. 

Alternatively, traders may also choose to hold onto the call option until expiry. In this case, they get to purchase the asset at the strike price and can immediately sell it in the market for a higher price. The price differential between the strike price and the market price would be the profit. One of the advantages of this strategy is that the profit potential is theoretically unlimited, whereas the risk is limited only to the premium paid for the call option. 

• Short Put 

Another one of the simplest bullish option strategies, the short put, involves selling the put option contract of an asset. By selling the put option contract, traders get the premium upfront. If the asset’s price rises, the put option loses its value and will expire worthless. 

However, unlike the long call, the maximum profit of this strategy is limited to the premium that the trader collects by selling the put option. The maximum loss, on the other hand, is theoretically unlimited since there’s no limit to how much the price of the asset can rise. This makes the short-put strategy highly risky to implement. 

• Bullish Call Spread

A bullish call spread strategy is a slightly more conservative bullish strategy compared to the other two bullish option strategies. It involves purchasing a call option at a particular strike price while simultaneously selling another call option with a higher strike price. However, both call options must have the same expiration date. Traders usually use this strategy when they expect a moderate upside movement in the underlying asset's price.

If the price of the asset rises moderately, the call option with the lower strike price will become profitable. The call option with the higher strike price will expire worthless, allowing traders to enjoy the premium from the sale of the said contract. This is the ideal scenario, with the potential for maximum profits. 

That said, if the price of the asset rises sharply (beyond the higher strike price call option), the call option with the lower strike price will still be profitable. The call option with the higher strike price, on the other hand, will be loss-making. However, the loss from the higher strike price call option will be offset by both the premium that the trader collects on the sale of the option as well as the profits from the call option that they purchased. 

• Bullish Put Spread 

A bullish put spread is also one of the more conservative bullish option strategies. It involves selling a put option at a higher strike price while simultaneously purchasing another put option with a lower strike price. For this strategy to work, both options must have the same expiration date.

If the price of the asset rises sharply, the put option with the higher strike price that the trader sold will expire worthless, allowing the trader to keep the premium that they gained by selling the option. Meanwhile, the put option with the lower strike price that the trader bought will also expire worthless. In this case, the trader would lose the entire premium paid to purchase the contract. The profit, therefore, would be the net premium. 

On the other hand, if the price remains stable, the put option with the higher strike price will be loss-making. The put option with the lower strike price that the trader bought will also expire worthless. However, the loss will be offset to a certain extent by the premium the trader collected on the sale of the put option with the higher strike price. 

Conclusion

With this, you must now be aware of bullish options strategies and the different types that traders often use. From simple long call positions to more complex strategies like bullish call spreads and bullish put spreads, these strategies offer flexibility and protect traders from losses to a certain extent. However, before implementing any option strategy, traders must carefully consider both the profit potential and the risk involved with it.

If you’re planning to implement bullish option strategies, the Research 360 platform powered by Motilal Oswal can be very helpful. The Futures & Options section of the platform can give you crucial insights into the open interest of both call options and put options, enabling you to construct a more accurate strategy based on the prevailing market conditions. 

Furthermore, the platform also offers a host of other useful information, such as the put-call ratio and the max pain value for particular option contracts. So, what’re you waiting for? Sign up for the Research 360 platform today and supercharge your options trading journey.