Options trading is a popular way to earn money in the stock market, and traders use a variety of strategies to make profitable trades. Two common bullish strategies are the Long Call Option and the Short Put Option. In this article, we will discuss these two strategies, their characteristics, advantages, and disadvantages, and how to implement them in the Indian market.
Long (Buy) Call Option Strategy
A Long Call Option is a simple options trading strategy that gives the buyer the right to buy an underlying asset at the strike price, which is a predetermined price that the asset must reach for the option to become profitable. In this strategy, the trader pays a premium to the seller of the option for the right to buy the asset. The trader profits when the price of the underlying asset rises above the breakeven price.
When to Use
This strategy is useful when the trader is bullish on the market direction and also bullish on market volatility. This strategy is the most common choice among first-time investors. It is a good strategy for those who believe that the market will make an upward move.
Advantages
The main advantage of a Long Call Option is the uncapped profit potential. The profit will increase as long as the underlying price rises, providing unlimited gains.
Disadvantages
The disadvantage of a Long Call Option is that the investor can lose the entire premium if the underlying asset price doesn’t rise above the strike price. The loss is limited to the premium paid.
How to Implement
Suppose a trader wants to implement this strategy on BankNifty, which is currently trading at 41,000. The trader buys a call option at a strike price of 41,000 for a premium of Rs. 130. If the price of BankNifty rises above the breakeven price which is the strike price + option premium at the time of expiry, the trader will profit. If it falls below the strike price, the trader will lose only the 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.
Short (sell) Put Options Strategy
A Short Put Option is a bullish options trading strategy in which the seller of the option agrees to buy the underlying asset at a predetermined price (strike price) if the buyer of the option exercises their right to sell the asset. The seller of the option receives a premium for selling the option.
When to Use
This strategy is useful when the trader is bullish on the market direction and bearish on market volatility. It is a good strategy for those who believe that the market will move upward, but not too much, and the volatility will remain low.
Advantages
The main advantage of a Short Put Option is that the seller can keep the premium if the option expires unexercised. This can provide a significant source of income to the seller. The seller can also acquire the underlying asset at a lower price than the current market price.
Disadvantages
The disadvantage of a Short Put Option is that the seller has an obligation to buy the underlying asset at the strike price, even if the market price falls below the strike price. This means that the seller can potentially suffer significant losses if the market price falls significantly.
How to Implement
Suppose a trader wants to implement this strategy on BankNifty, which is currently trading at 41,000. The trader sells a put option at a strike price of 40,800 for a premium of Rs. 73.85. If the price of BankNifty remains above the breakeven price, the trader will keep the premium. If it falls below the strike price, the investor will have to buy the underlying asset at the strike price.
The image below shows the payoff chart, the probability of profit, the maximum profit & loss, the breakeven point and the estimated margin required for short put option strategy.
Conclusion
In conclusion, Long Call Option and Short Put Option are two bullish options trading strategies that can be used to generate profits in a bullish market. The Long Call Option is a good choice for those who are bullish on market direction and volatility, while the Short Put Option is a good choice for those who are bullish on market direction but bearish on volatility
