Bullish Options Strategies

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Chapter 26 — Bullish Options Strategies
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Bullish Options Strategies

Bullish strategies are used by traders who anticipate large and swift increases in an underlying security. For example, if a trader believes a company is about to win an important lawsuit, they will use a bullish strategy.

i. Long Call Options

The Long Call Options strategy is the simplest bullish options trading strategy and the most commonly used. A long call strategy is simply buying a long call option. Buying long call options offers the protection of a limited downside while also giving the opportunity for leveraged gains. Long call options also allow you to build up to more complex options strategies.

ii. Writing a Naked Put

Writing a naked put is when you sell a put option without first having a short position in the stock. What “naked” means, in this case, is that you are selling an option where you do not have a position to cover the option. If the stock rises and the option expires out of the money, you will take the whole price of the option as a profit. If the stock price falls, then you will lose money on the trade.

You can also make money by writing a naked put option even if the price of the stock remains neutral. This is because of the time decay quality of options contracts. When writing an option, you benefit from the time decay of the option, meaning that the value of the option you sold will decrease as the expiration date nears. This decrease in value is your profit.

Naked put options are never truly uncovered because all option trading brokers require you to have the money available to cover the option if it is exercised.

iii. Strap

A strap is a complex option-strategy where the trader buys two call options and one put option, all with the same strike price, maturity, and underlying asset. This trade sometimes called a “triple option” is used when a trader anticipates a price movement that is more likely to be up than down. If the price goes up, the trader will make a large profit, but they are still protected from losses by the put option.