How to make profit using bullish option trading strategies?

Nilesh Jain

27 Dec 2016

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.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How to make profit using bullish option trading strategies?

Nilesh Jain

27 Dec 2016

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.

Have Referral Code?