Article

How to make profit using bullish option trading strategies?

17 Aug 2017 Nilesh Jain

Bullish options trading strategies are used when options trader expects the underlying assets to rise. It is very important to determine how much the underlying price will move higher and the timeframe in which the rally will occur in order to select the best options strategy. The simplest way to make profit from rising prices using options is to buy calls. However, buying call is not necessarily the best way to make money in moderately or mildly bullish market. Following are the most popular strategies that can be used depend upon different perspectives.

Extremely bullish- Long call

Moderately bullish- Bull call spread

Long Call

When to initiate a Long call?

Long call is best used when you expect the underlying asset to increase significantly in a relatively short period of time. It would still benefit if you expect the underlying asset to rise slowly. However, one should be aware of the time decay factor, because the time value of call will reduce over a period of time as you reach near to expiry.

Why to use the Long call

This is a good strategy to use because downside risk is limited only up to the premium/cost of the call you pay, no matter how much the underlying asset drops. It also gives you the flexibility to select risk to reward ratio by choosing the strike price of the options contract you buy.

Strategy Buy/Long Call Option
Market Outlook Extremely Bullish
Breakeven at expiry Strike price + Premium paid
Risk Limited to premium paid
Reward Unlimited
Margin required No

Let’s try to understand with an Example:

Current ABC Ltd Price 8200
Strike price 8200
Premium Paid (per share) 60
BEP (strike Price + Premium paid) 8260
Lot size 75

Suppose the stock of ABC Ltd is trading at Rs. 8,200. A call option contract with a strike price of Rs. 8,200 is trading at Rs. 60. If you expect that the price of ABC Ltd will rise significantly in the coming weeks, and you paid Rs. 4,500 (75*60) to purchase single call option covering 75 shares. So, as expected, if ABC Ltd rallies to Rs. 8,300 on options expiration date, then you can sell immediately in the open market for Rs. 100 per share. As each option contract covers 75 shares, the total amount you will receive is Rs. 7,500. Since you had paid Rs. 4,500 to purchase the call option, your net profit for the entire trade is, therefore Rs. 3,000. For the ease of understanding, we did not take into account commission charges.

Analysis Of Long Call Strategy:

Long call strategy limits the downside risk to the premium paid which is coming around Rs. 60 per share in the above example, whereas potential return is unlimited if ABC Ltd moves higher significantly. It is perfectly suitable for traders who don’t have a huge capital to invest but could potentially make much bigger returns than investing the same amount directly in the underlying security.

Similar Articles
  • Responses
  • Patidar Samaj

    - 2 hrs ago

    This article claims RJio was given a "Backdoor Entry" into the 4G Based Voice Routing. The peculiar aspect is without the Voice License, Rjio would have been a mere ISP. With the license, it is now a holistic communications service provider, with ability to exponentially scale the bouquet of products. The events indicate it was meticulously planned way before the auctions because the auctions were clear on the agenda: 4G for internet only.

Load More
Have Referral Code?

Recent Articles

Beginner's Corner

How to make profit using bullish option trading strategies?

17 Aug 2017 Nilesh Jain

Bullish options trading strategies are used when options trader expects the underlying assets to rise. It is very important to determine how much the underlying price will move higher and the timeframe in which the rally will occur in order to select the best options strategy. The simplest way to make profit from rising prices using options is to buy calls. However, buying call is not necessarily the best way to make money in moderately or mildly bullish market. Following are the most popular strategies that can be used depend upon different perspectives.

Extremely bullish- Long call

Moderately bullish- Bull call spread

Long Call

When to initiate a Long call?

Long call is best used when you expect the underlying asset to increase significantly in a relatively short period of time. It would still benefit if you expect the underlying asset to rise slowly. However, one should be aware of the time decay factor, because the time value of call will reduce over a period of time as you reach near to expiry.

Why to use the Long call

This is a good strategy to use because downside risk is limited only up to the premium/cost of the call you pay, no matter how much the underlying asset drops. It also gives you the flexibility to select risk to reward ratio by choosing the strike price of the options contract you buy.

Strategy Buy/Long Call Option
Market Outlook Extremely Bullish
Breakeven at expiry Strike price + Premium paid
Risk Limited to premium paid
Reward Unlimited
Margin required No

Let’s try to understand with an Example:

Current ABC Ltd Price 8200
Strike price 8200
Premium Paid (per share) 60
BEP (strike Price + Premium paid) 8260
Lot size 75

Suppose the stock of ABC Ltd is trading at Rs. 8,200. A call option contract with a strike price of Rs. 8,200 is trading at Rs. 60. If you expect that the price of ABC Ltd will rise significantly in the coming weeks, and you paid Rs. 4,500 (75*60) to purchase single call option covering 75 shares. So, as expected, if ABC Ltd rallies to Rs. 8,300 on options expiration date, then you can sell immediately in the open market for Rs. 100 per share. As each option contract covers 75 shares, the total amount you will receive is Rs. 7,500. Since you had paid Rs. 4,500 to purchase the call option, your net profit for the entire trade is, therefore Rs. 3,000. For the ease of understanding, we did not take into account commission charges.

Analysis Of Long Call Strategy:

Long call strategy limits the downside risk to the premium paid which is coming around Rs. 60 per share in the above example, whereas potential return is unlimited if ABC Ltd moves higher significantly. It is perfectly suitable for traders who don’t have a huge capital to invest but could potentially make much bigger returns than investing the same amount directly in the underlying security.