A bullish market exhibits an upward trend. It can be for a few hours, days, weeks or even for a few months. This option is one of the most purchased by traders including the novices who believe it is easy to transact. There is also the notion that it is easy to make money when the prices go up. The basic characteristic of bullish strategy is that the price of the underlying asset moves upwards the only difference being how high and also the time frame involved.
Reasons for purchasing a call option
There are two main reasons that drive a trader to purchase a call option on an underlying commodity. This is when the price has for some time taken an upward trend and depending on the kind of information on the market trends, the trader expects this pattern to continue. The next reason is when a commodity's price has undergone a downward trend for some time but the information at hand indicates it will resume an upward climb soon.
Bullish strategies
There are three bullish trading strategies taken depending on the expectations on the movement of the price in a given timeframe.
Call buying strategy
This is the most bullish and is attractive to novice traders. Also referred to as the long call option strategy, it is the most common where traders purchase call options under the notion that the price of the commodity will rapidly rise to the predicted mark before the set time limit expires. Traders adopting this strategy have leverage over the rest as the low priced options will be taken up fast by most traders and the price of the underlying asset rise steadily. The call options have a limited existence. If the price of the underlying asset fails to move beyond the strike price before the lapse of the set time, the call option purchased is lost. However this option presents unlimited possibilities for making money. There is indeed no to how much the price can move upwards before the lapse of the set time and hence no limit to the amount of money a trader can make from this one single purchased option. Any loss to be incurred from the trade is only limited to the amount invested regardless of how low the price will move at the expiration of the specified time. To understand this better and the risks involved, it is crucial to look at the following:
Illustration:
Let assume that asset C is trading at $40. With an expiration time of forty eight hours, a call option with a price of $ 40 is set at $2. As a trader, you have reasons to believe that the price of asset C will move upwards before the lapse of the said time and in a bid to make a kill you place $200 to buy one $40 call option with exactly 100 shares. As expected, the price of asset C rises to $50 at the expiry time. This one single move racks in a profit of $10 per unit then multiply by one hundred, the number of units purchased adding up to $1000, a wonderful return indeed. However, if the vice versa was to happen and the prediction was wrong with the price slipping to $30 at the expiry time, your investment of $200 is lost.
Bull spreads
This is the second bullish strategy adopted by traders. In this option, traders rationalize that prices of assets rarely fall or rise in large bounds. It is hence a strategy to reduce the risks involved. The bull spread strategy is exercised in a number of ways. There is the vertical spread where the trader purchases the assets with the lower consideration while disposing off those with higher prices. In horizontal and diagonal spreads, traders believe that an asset's price is likely to be stable in the short while but will move upwards eventually. For the mildly bullish strategy, traders expect that the price will not move down. A perfect example of these strategies is the writing out of the money covered calls or (OTM).
Whatever the approach adopted, it is crucial to know that the market trends do not always record an upward trajectory. A look at the graph will reveal the upward and the downward movement of prices. This hence calls for resilient vigilance by the trader to withdraw at the first instance of price change.
For a trader whose market analyses reveals that the market fundamentals are pointing towards an uninterrupted rise in prices, bullish strategies should be adopted as they offer the most clear method of making money.
Benefits of bullish trading strategy
There are a number of general benefits to be accrued from bullish trading strategy. A trader can make huge profits from rise in prices even without of an asset even without having to own the asset. This is the basic advantage of options trading. Day to day traders do not have to purchase the assets but rather purchase an option on that commodity. It is the traditional investors who feel the pinch when the movement of the price takes an unfavorable turn. To make money in this trade does not also require much expertise, experience or training. Sometimes all it takes is a precise prediction and you are rolling in money. As long as the price keep going up a bullish trader makes money. Likewise if the price is falling there is always an expectation that the price will take an upward trend soon and the bullish trader will make money.
Another major benefit of bullish trading strategy is the hype that can be infused amongst traders to ensure the prices keep going upwards.
The key to making huge profits in bullish strategy is to always purchase assets whose direction of movement in price you can predict. It is sometimes hard to precisely predict the movement but for the experienced traders, dealing in the traditional and the more stable commodities can provide a secure window of returns. Diversifying is too a crucial way through which to minimize losses amongst bullish traders.
Jatinder Kaur
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