Bull Market Options Trading Strategies
This is an introduction to various options trading strategies from basic trades to complex, multi-leg trades for a rising market. The profits and losses discussed in these examples do not include commissions, interest, or taxes.
Buy Calls - (Risk: Limited / Reward: High) Buying calls is the most basic of bullish option strategies. Buying calls gives you the ability to control more shares of a stock with less capital at risk than buying the underlying shares. Your maximum loss when buying calls is the amount paid for your contracts. In order to profit from buying calls, you need to be right about the stock price rising, plus it needs to go up prior to the expiration date. Unlike buying a stock, buyers of calls have to be right on both the direction of the stock price, and the time frame in which it will occur.
Sell Naked Puts - (Risk: High / Reward: Limited) Selling naked puts is a high risk option strategy. When you sell naked puts you collect a premium for the sale of the contracts in hopes that the stock price will remain above the strike price past expiration. That way the options will expire worthless, and you keep the entire premium. If you are wrong and the stock price falls below the strike price, losses can mount in a hurry. If you decide to employ this strategy, it's best to sell near term options since option prices decay quicker the closer you get to expiration.
Bull Call Spreads - (Risk: Low / Reward: Limited) Bull call spreads are generally created by buying and at-the-money call and selling the same number of out of the money calls. By selling the higher strike price calls, you limited your risk by collecting a premium to help offset some of the cost of the lower strike calls you bought. However, this also limits your profit potential. On this trade, your maximum loss potential is the net cost of initiating the trade (i.e premium paid less premium received). Your maximum profit is the spread between the two strike prices times the number of shares controlled, less the cost of initiating the trades.
Bull Put Spreads - (Risk: Low / Reward: Limited) A bull put spread is like selling naked puts with an insurance policy. The trade is initiated by selling puts and then buying the same number of puts at a lower strike price. Buying the lower strike price puts limits your downside to the spread between strikes times the number of share controlled, less the net premium received for initiating the trade. Your maximum profit is the net premium received for the trade. Like naked puts, this trade makes its profit on the time decay of the options, with the ultimate goal being for the stock to go up, and the options expire worthless.
Call Back Spreads - (Risk: Low / Reward: Limited) Call back spreads (which are bull ratio spreads with a net long position) are best used when you are expecting a large gain in an already volatile stock. The strategy involves selling calls at one strike price and buying more calls at a higher strike price. Ideally, the premium received for the sell, and paid for the buys, should be close to offsetting each other. This will greatly limit your downside should the stock move down in price. Maximum profit for this trade is achieved as the stock rises above the higher strike price. For this reason, many traders choose to initiate this trade using in-the-money calls.
To learn about options trading strategies for other market conditions and situations, visit our option strategy overview page.
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