Advanced Options Strategies
Bullish Options Trading Strategies
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Very Bullish
Strategy View
Investor thinks that the market will rise significantly in the short-term.
.
Strategy Implementation
Call options are bought with a strike price of (a). The more bullish the
investor is, the higher the strike price should be.
Upside Potential
Profit potential is unlimited and rises as the market rises.
Breakeven Point at Expiry
Strike price plus premium.
Downside Risk
Limited to the premium paid - incurred if the market at expiry is at,
or below, the strike (a).
Margin
Not required
Comment
If the market does little then the value of the position will decrease
as the option time value falls.
Moderately Bullish
+ Certain that market will not fall
Strategy View
Investor is certain that the market will not go down, but unsure/unconcerned
about whether it will rise.
Strategy Implementation
Put options are sold with a strike price (a). If an investor is very bullish,
then in-the-money puts would be sold.
Upside Potential
Profit potential is limited to the premium received. The more the option
is in-the-money, the greater the premium received.
Breakeven Point at Expiry
Strike price less premium.
Downside Risk
Loss is almost unlimited ("almost" as the underlying price can
not fall below zero!). High risk strategy. Potential huge losses incurred
if the market crashes. [If the strategy appeals, but not the downside
risk, investors may prefer a bull spread].
Margin
Always required
Coment
If the market does little, and time passes, this helps as the short position
gains when the time value erodes.
Moderately Bullish
+ Fairly certain that the market will not fall
Strategy View
Investor thinks that the market will not fall, but wants to cap the risk.
Conservative strategy for one who thinks that the market is more likely
to rise than fall.
Strategy Implementation
Call option is bought with a strike price of (a) and another call option
sold with a strike of (b), producing a net initial debit,
OR
Put option is bought with a strike of (a) and another put sold with a
strike of (b), producing a net initial credit.
Upside Potential
Limited in both cases -
Calls: difference between strikes minus initial debit
Puts: net initial credit
Maximum profit if market at expiry is above the higher strike.
Downside Risk
Limited in both cases -
Calls: net initial debit
Puts: difference between strikes minus initial credit
Maximum loss if at expiry market is below the lower strike.
Margin
Margin requirements if spread is a credit spread.
Comment
Time value erosion not too significant due to the balanced position
Bearish in immediate near-term
(weeks)
+ Bullish in longer term (months)
Strategy View
Investor thinks that the market will be weak in the short-term, but then
rally later.
Strategy Implementation
A near-dated call option is sold, and a longer-dated, further out-of-the-moneycall
option is bought.
Upside Potential
Unlimited, if the bought option is held after the short option expires
(the position then becomes a straight-forward buy call). If the position
is closed at expiry of the near option, maximum profit will accrue if
the market is at the level of the sold strike.
Downside Risk
Limited to the difference in strikes plus/minus the initial debit/credit
when establishing the spread.
Margin
Margin may be required if credit produced or if the delta of the short
positions exceed the delta of the long positions.