All the Option Strategies in one go!

In stock markets we tend to hear and say the term “Bulls” and “Bears” so much and so often that sometimes I fear that I will forget that these are animals as well. Probably, some day when my kid would ask me about a bull, I would end up telling him about some up move in prices (seriously dread that day). So, how did these terms get attached to price movement (not just in stock markets)? There is no clear explanation to it, but it is probably the way that these two animals charge (attack) their enemies, while the bull thrusts its horns up in the air, the bear will swing down. Other possible explanation is about their attitude, bulls are charged and bears are sluggish.

Ordinarily, being bullish means to buy stocks or futures. That’s investing lot of money in the form of margins or cash deployment. It’s like a “one fits all” situation. Whatever your conviction level and capital investible you can do just one things. Also, it doesn’t give flexibility in terms of position taken in terms of modifying or repairing.

So, whether you are extremely bullish, bullish or mildly bullish; in all the situations you do the same thing. But with options you have the leeway to create positions which clearly spells out your conviction and the capital investible (basically the risk you would like to take). To discuss a few with you when you are bullish, are:

Long Call: It’s a vanilla position. With a bullish (even a mildly bullish) view one can buy an OTM Call. The risk is limited to the extent of premium paid. Here time is the essence, the quicker the underlying moves towards the strike, the more you benefit. Here “Delays are Denials”, late move can eat our gains due to Theta.

Short Put: Again a vanilla position but with high risk and limited gain (to the extent of premium). In case of a bullish view one can write an OTM Put (not preferred in case one is not very sure). Even a flat move will keep benefiting you via “Theta”

Synthetic Long: Combination of Long Call and Short Put of the same strike. Its pay off (risk profile) is like that of a long future. The benefit being the Long Call is funded by Short Put, so amount at stake reduces (thus increasing the ROI). Low investment but high risk coming out of Short Put, so view should be convincingly bullish. Timing will not be crucial as Theta loss in Long Call will be partially covered by Short Put.

Combo: Similar to Synthetic Long, it’s a combination of Long Call and Short Put of different strikes. Rest stays the almost the same.

Bull Spreads using Calls: This is one of the most interesting strategy. In case you are mildly bullish you can create a spread, where is you buy an ATM Call and Sell an OTM Call. So, you have decided your selling price as well. Your investment is to the extent of the Premium differential and gain is limited to the Strike differential – Premium differential. Risk is limited to the amount of premium invested. Timing may not be so much of an issue as the OTM Call losses lot of theta early on and an ATM Call losses in second half of the expiry.

Bull Ratio Spreads: Going one step further on the Bull Spreads, in case you are extremely convinced on the upside resistance, instead of Selling one OTM Call you can sell Two or Three OTM Call or even ladder them (sell OTM Calls of different strikes. The benefit here is your Long Call position will be zero cost. So, ROI is explosive. The risk for sure shoots up as your Short Gamma and Short Vega is very high. So if the stock surges sharply above the Calls sold you may lose money. Sounds, ironical because you are bullish, underlying moved up sharply and yet you lost money. But your Short positions far exceeded your Long positions

This is just the tip of the iceberg. The list is long & exhaustive. Remember, options strategy is about your creativity in which you bet on your conviction. The term “financial engineering” applies well in this case. The text book question of whether investing is art or science, is well answered here. Options is an art (the way you position yourself) and it’s a science (the whole concept of pricing and Greeks which runs in the background).

So, let’s not stay fixed at the dodo strategy of “one fits all but” lets tailor make it to our conviction and risk capacity. If you would like to know more get in touch with us.

Happy Trading.

Cheers!!!