Bullish Option Strategy..1

This item was filled under [ Knowledge, Option Strategies ]

This is one of the simplest bullish strategy.

Strategy = Long Call
Construction = Buy one CALL option
Suitable Market Condition = Bullish trend (very strong to medium strong). Better to avoid this in mild bullish conditions as time decay will nullify the marginal increase in premium due to mild upmove.
Suitable Volatility at entry = Low volatility as premium will be less. As volatility increases, we get extra rise in premium due to increased volatility
Max Risk = Limited. Premium paid + Brokerage. This will be hit when price at expiry remains below the strike price of CALL option.
Max Profit = Unlimited (theoretically). More practical will be to call it as Limited but without any upper cap.
Breakeven Point = Strike price + Premium paid. As long as market remains above breakeven point the position will result in a profitable trade.

Limitation - It is costlier then other bullish strategies. Sensitive to drop in volatility and time decay.

Example

Market condition – NIFTY is finding support at 4000 level. Other moving average lines are also providing support near this zone. So we are bullish on the direction of market. Our analysis says that market might be heading towards 4300. So we decide to buy 4100 Call.
Position construction = Buy 1, NIFTY 4100 CALL (@121 Rs.)
Breakeven point = 4100 + 121 = 4221
Max risk = 121 + brokerage.

We can always cut our risk and don’t have to wait for accepting maximum risk. Read more about Managing loss on an options trade here.

Similar Strategies that have limited risk and unlimited upside potential = Protective Put / Married put / Call backspread.

Be Sociable, Share!
Tagged with: [ ]
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Comment on “Bullish Option Strategy..1”

  • swamy
    8 April, 2010, 11:15

    dear,
    what is the reason by choosing the strike price as 4100 why can’t you choose 4000 or 3900 and 4200. is there any special strategy for choosing strike price. if so please, tell me that how to choose the strike price.

Leave a Comment