Options trading is a popular way for traders to take positions on market direction and volatility. There are many different strategies available, each with its own advantages and disadvantages. In this article, we will focus on two bullish options trading strategies: Call Bull Spreads and Put Bull Spreads.
Call Bull Spread
A call bull spread is a bullish option strategy where a trader buys a call option with a lower strike price and sells a call option with a higher strike price in the same expiration month. This strategy is also known as a long call spread. The trader profits if the price of the underlying asset goes up but not beyond a certain point, which is determined by the strike prices of the call options used.
When to use
A call bull spread is an ideal strategy to use when a trader is moderately bullish on the market direction and wants to limit their risk. It is suitable for traders who have a price target in mind for the underlying asset and do not expect it to rise significantly beyond that level.
Advantages
A call bull spread is a cost-effective way to take a bullish position in the market. The cost of the long call option is partially offset by the premium received for the short call option, reducing the cost of entering the position. Additionally, this strategy provides a limited risk and reward profile, which is known upfront.
Disadvantages
The maximum profit that can be made in a call bull spread is limited to the difference between the two strike prices, minus the net premium paid for the spread. If the market moves significantly beyond the higher strike price, the trader will not make any additional profit. Also, the potential maximum loss is limited to the premium paid for the long call option minus the premium received for the short call option.
How to implement
Let us consider an example of Banknifty, which is currently trading at 41000. Suppose a trader believes that Banknifty will rise moderately to 42000 over the next month. The trader can implement a call bull spread by buying a call option with a strike price of 41000 and selling a call option with a strike price of 42000, both with the same expiration date. Suppose the cost of the long call option is Rs. 500 and the premium received for the short call option is Rs. 200. In this case, the net premium paid for the spread is Rs. 300. The maximum profit that can be made is Rs. 700, which is the difference between the two strike prices (Rs. 1000) minus the net premium paid (Rs. 300). The maximum loss that can be incurred is Rs. 300, which is the premium paid for the long call option minus the premium received for the short call option. The breakeven point for this strategy is Rs. 41300, which is the lower strike price plus the net premium paid.
The image below shows the payoff chart, the probability of profit, the maximum profit & loss, the breakeven point and the estimated margin required for long call option strategy.
Put Bull Spread
Put Bull Spreads are a type of options trading strategy used by traders who are bullish on the direction of the market. A Put Bull Spread is created by buying a long put option with a lower strike price and selling a short put option with a higher strike price in the same expiration month. This strategy has a limited risk and limited reward profile, which makes it an attractive option for traders who want to take a position in the market with a controlled level of risk.
When to Use
A Put Bull Spread is an ideal strategy to use when a trader is bullish on the market direction but wants to limit their risk. This strategy allows traders to profit from a bullish move in the market, but with limited risk.
Advantages
One of the main advantages of using a Put Bull Spread is that it limits the trader’s risk. The maximum loss is limited to the difference between the two strike prices minus the net premium received for the position. This makes it a good strategy for traders who want to take a bullish position in the market, but do not want to risk too much capital.
Disadvantages
One of the disadvantages of using a Put Bull Spread is that the maximum profit is limited. The maximum gain is limited to the net credit received for the spread, which is the premium received for the short option minus the premium paid for the long option. This means that the trader may not be able to fully capitalize on a bullish move in the market.
How to Implement
To implement a Put Bull Spread, the trader should first buy a long put option with a lower strike price and then sell a short put option with a higher strike price in the same expiration month. For example, suppose the current market price of Banknifty is 41000. A trader can implement a Put Bull Spread by buying a long put option with a strike price of 41000 and selling a short put option with a strike price of 40000. The net premium received for this spread would be the premium received for the short option minus the premium paid for the long option. The maximum loss would be limited to the difference between the two strike prices minus the net premium received for the position.
Conclusion
In conclusion, both call bull spread and put bull spread are suitable strategies for traders who are moderately bullish on the market direction and have a price target in mind for the underlying asset. This strategy provides a limited risk and reward profile and is a cost-effective way to take a bullish position in the market.
