bull call strategy part 2

With this strategy, your potential loss is limited to the premium you paid for the calls less commissions and the premium you collected for the calls you sold. Unlike the outright purchase of a call option, your potential profits are limited to the difference between the strike prices multiplied by 100 times the point value of the contract, less the cost of establishing the position. An option calculator such as Option-Aid performs these calculations for you instantaneously.

When we initiate a Bull Call Spread, the call that we purchase is normally at-the-money. We try to allow enough time for the market to make the anticipated move. The call we sell has the same expiration date, with a higher strike price (at a price point that we feel the asset can easily move to within the time period until expiration, yet not too high because it lowers the premium we are collecting to lower our cost basis).

It is important to discuss an additional benefit of doing a Bull Call Spread instead of buying just a call option when the issue you are considering has high volatility. If you purchase a call option on an asset that has high volatility, the asset price could go up, as you expected, yet at the same time, the option price could drop if the implied volatility of the asset declines significantly during that time. So although you were right about the directional movement of the asset, you would have lost money in a straight call option play. A Bull Call Spread could ameliorate that risk, because it is the spread between the call option prices that determines your profit. The call that you sold would also go down in value as volatility declined, but the spread between the call prices would increase as the price of the underlying asset increased. That would give you a profit instead of a loss.

It is also important to cover risks and caveats of this strategy.

The risk of this position is limited and known as described above. Remember that the commission you pay for this position will be higher than the commission for a straight option play, because you are initiating two related option transactions.

When you initiate a Bull Call Spread rather than outright purchase of a call, you are limiting your upside potential. If the asset price rockets skyward, then you aren't able to fully participate in that gain because the higher strike price call that you sold will probably be exercised, limiting your gain.

The major benefits of this strategy occur when volatility is high, making the purchase of calls expensive and increasing the risk of a drop in volatility.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

source: www.mindxpansion.com
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bull call strategy part 1

according to www.wikipedia.com, a bull spread is a bullish, vertical spread options strategy that is designed to profit from a moderate rise in the price of the underlying security.

Because of put-call parity, a bull spread can be constructed using either put options or call options. If constructed using calls, it is a bull call spread. If constructed using puts, it is a bull put spread.

A bull call spread is constructed by buying a call option with a low exercise price, and selling another call option with a higher exercise price.

Often the call with the lower exercise price will be at-the-money while the call with the higher exercise price is out-of-the-money. Both calls must have the same underlying security and expiration month.

When the market is volatile and you are moderately bullish on it, you can minimize your cash invested in a position, and minimize your risk while still reaping high profit potential by utilizing a Bull Call Spread. This strategy involves buying a call option at one strike price and selling a call on the same asset at a higher strike price. Usually both options will have the same expiration date.

Your cost in establishing this position is less than it would be in just buying a call option, because you are also selling a call at a higher strike price. So you are taking in some money from that sale which reduces your cost outlay and raises your ultimate return-on-investment.

source: www.mindxpansion.com
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selling puts strategy

With this strategy, you are selling someone the right to sell you the underlying asset at a fixed price (the strike price), on or before the expiration date of the option.

This strategy has several great benefits.

If the asset price is above the exercise price at expiration, the puts will not be exercised and you just pocket the option premium. You can do this over and over again and may never get the asset "put" to you if the asset is above the exercise price at expiration of the option. This generates continuous income for you, increasing your portfolio and generating cash flow for other investments.

If the puts you sold do get exercised, then you are obligated to purchase the asset at the exercise price. But you essentially get it at a discount. You have already agreed that you would like to purchase the quality asset at the exercise price and the price is further discounted by the option premium that you collected.

If the asset does get put to you, you could then also sell covered calls on it to reduce your basis in the asset even further.

If you are thinking about purchasing an asset anyway, this strategy can be used to purchase the asset at a discount, or generate income for you as you stand ready to purchase the asset at a discount.

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tips about calls and puts strategy

here are some more things you need to know before jumping in the trading arena.

The most basic option strategies involve buying calls or puts, depending on your market view.

When you are very bullish on the market, you can buy calls to profit from an upward movement that occurs while you own the option.

A call is the right, but not the obligation, to purchase an asset at a specific price (the strike price), on or before a specific date (the expiration date).

The person who sold you the option actually holds the underlying asset, so they would absorb the rest of the loss.

When we purchase calls, we generally purchase them at-the- money or in-the-money, because it lowers our risk of losing the premium. Although out-of-the-money options are much cheaper and provide greater leverage, there is a greater risk of loss. We generally buy them several months out to provide enough time for the market to make the anticipated move.

Options are not like stocks where you buy them and hold them. Decay will continually erode your position and a change in trend can evaporate your profits quickly. It is important to set a specific target price for the option when you initiate the position. When we reach our target, we sell and take our profits. Beware that greed can be a strong motivator and make you want to increase your price target as it is rising. However, doing that can sometimes turn a winning position into a losing position.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

When you are analyzing potential option positions, it helps to have a computer program like Option-Aid that swiftly calculates volatility impacts, probabilities, statistics, and other parameters of interest. These programs can pay for themselves with the first trade that they help you with.

source: www.mindxpansion.com
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