Bullish Options Trading Strategies
Bullish options trading strategies are strategies that are suitable for when you expect the price of an underlying security to rise. The obvious, and most straightforward, way to profit from a rising price using options is to simply buy calls. However, buying calls options isn't necessarily the best way to make a return from a moderate upwards price movement and doing so offers no protection should the underlying security fall in price or not move at all.
By using strategies other than simply buying calls, it's possible to gain some notable advantages. On this page, we look at some of the advantages of using such strategies, as well as the disadvantages. It also provide a list of the most commonly used ones.
- Why Use Bullish Options Trading Strategies?
- Disadvantages of Bullish Options Trading Strategies
- List of Bullish Options Trading Strategies
Why Use Bullish Strategies?
Buying calls is a strategy in its own right, and there are certainly circumstances when a simple purchase of calls is a viable trade. There are downsides of buying calls too though. For one thing, you run the risk that the contract you buy will expire worthless and generate you no return at all, meaning you lose your entire investment.
You'll always be subject to the negative effects of time decay, and you will probably need the price of the underlying security to rise reasonably significantly in order to make any profit. This doesn’t necessarily mean buying calls is always a bad idea, because there are risks involved in any form of investment. It is, however, possible to avoid some of those downsides by taking alternative approaches.
Each bullish trading strategy comes with its own unique characteristics, and you can select a strategy that is most likely to help you achieve whatever it is you are aiming for. For example, you could use one that reduces the cost of buying calls by also writing calls with a higher strike. This could also help you reduce the negative effect of time decay on your position, something you could also do by using a strategy that involved the writing of puts.
Another advantage is that you can create credit spreads, which return an upfront payment, rather than debit spreads which carry an upfront cost. The main point is that by using bullish trading strategies, you can enter a position that profits from an increase in the price of the underlying security and also control other factors that may be important to you, such as the level of risk involved or the amount of capital required.
Using strategies other than a straightforward purchase of call options isn't without disadvantages though. With pretty much any form of investment, if you want to gain extra benefits from your approach, then you have to sacrifice something in return. The same is true for options trading.
The main advantage of buying calls is that your profits are theoretically unlimited, because you continue to profit the more the price of the underlying security rises. The biggest sacrifice that you make with most bullish trading strategies is that the potential profits you can make are limited to a certain amount. However, given that most options trades are based on relatively short term price movements, and financial instruments don't frequently move in price by huge amounts; this isn't necessarily a major drawback.
Another disadvantage is the added complication of trying to choose the right strategy. The concept of buying calls is by itself relatively simple. If you think a financial instrument is going to increase in price, then you can benefit from that increase with a straightforward transaction. Complicating matters by trying to maximize your potential profits or limit your potential losses obviously involves more time and effort.
You'll typically pay higher commissions too, because most strategies require multiple transactions to create spreads. However, overall you are far more likely to be consistently successful when trading options if you get to know all about the different trading strategies and learn which ones to use and when.
List of Bullish Options Trading Strategies
The following is a list of the most commonly used strategies that are appropriate for a bullish outlook. We have included some brief information about each one, including how many transactions are involved, whether a debit or credit spread is created and whether or not the it's suitable for a beginner.
For more detailed information on each strategy, such as how to use it, its advantages, and it's disadvantages, simply click on the relevant link. For more assistance in choosing a suitable trading strategy you may like to use our Selection Tool for Options Trading Strategies.
This is a single position strategy that involves only one transaction. It's suitable for beginners and comes with an upfront cost.
Only one transaction is required for this, and it produces an upfront credit. It isn't suitable for beginners.
This is a simple strategy suitable for beginners. It involves two transactions to create a debit spread.
This is straightforward but it's not really suitable for beginners because of the trading level required. A credit spread is created using two transactions.
This is complex and requires two transactions; as such it isn't suitable for beginners. It can create either a debit spread or credit spread, depending on the ratio of options bought to options written.
This relatively complicated trading strategy isn't ideal for beginners. Two transactions are involved, and a credit spread is created.
There are two types of bull butterfly spread: the call bull butterfly spread and the put bull butterfly spread. It's a complex trading strategy, requiring three transactions, that creates a debit spread. It isn't suitable for beginners.
There are two types of bull condor spread: the call bull condor spread and the put bull condor spread. This strategy requires four transactions and it's not suitable for beginners. It creates a debit spread.
This is a complex trading strategy requiring three transactions. It creates a debit spread and it's not suitable for beginners.