5 Bullish Options Strategies to Consider
Stock traders who believe an underlying asset will increase in price can utilize bullish options strategies to make a profit. Options contracts are much more complex than equity, but there is also potential to make more money. The trader must determine how high they think the stock will go and within what timeframe.
Since options have expiration dates, you can be right to believe the stock will move up, but if it doesn’t happen before the expiration date, you can lose money on a bullish options strategy. Additionally, factors like implied volatility can play a part in the price of options.
Bull Put Spread
One of the most popular bullish options strategies is the bull put spread, or a put credit spread. Traders can construct a bull put spread by selling a put and simultaneously buying a lower strike put in the same expiration. The bull put spread is a high probability trade because it will profit if the underlying stock moves up or doesn’t move much at all.
Since the bull put spread benefits from theta decay, traders will make money even if the stock goes sideways after the trade is placed. Additionally, the bull put spread is suitably hedged as traders are also long a put option in case the stock drops in price.
Cash Secured Put
The cash secured put is another excellent bullish options strategy because, worst case, you end up owning 100 shares of stock per contract you sell. A cash secured put is when a trader sells a put option and set aside enough cash to purchase the 100 shares at the strike price in case he get assigned.
The cash secured put is similar to the bull put spread, except traders do not purchase a lower strike put to hedge the position. Therefore, cash secured puts are slightly more bullish than the bull put spread. Additionally, traders may have to accept assignment of 100 shares of stock at the strike price if the put option goes in the money (ITM).
Poor Man’s Covered Call
The poor man’s covered call (PMCC) is when a trader buys a long-term in-the-money (ITM) call option and sells a short-term out-of-the-money (OTM) call option against it. The ITM call acts similar to 100 shares of stock, but it is cheaper to purchase than 100 shares which gives this strategy its name.
After placing a poor man's covered call, if the stock moves up, traders will profit much more on the long call option than what is lost on the short call. If the stock moves up slightly, it is possible to make money on the long and short calls, thanks to theta working against the short calls.
Bull Call Spread
A bull call spread is constructed by purchasing a call option, then selling a higher strike call option to hedge it. The bull call spread is similar to the poor man's covered call, except both options are within the same expiration.
The goal with the bull call spread is to make money on the long call option while losing little to nothing on the short call. It is possible to make money on both options if the stock ends up between the chosen strike prices.
Bullish Options Strategies: Bottom Line
If you believe a stock will move up shortly, bullish options strategies are a fantastic way to generate a profit. You must analyze implied volatility and the stock chart to maximize your profit as an options trader.
If implied volatility is high, option selling strategies like the bull put spread and cash secured put are good choices. On the other hand, if implied volatility is low, you may be better off with an option buying strategy like a bull call spread or a poor man's covered call.
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