Options are considered a sophisticated investing strategy to be used only by experienced investors and traders. However, in recent years they have become more accessible to retail investors through the rise of digital brokerages and investing applications, such as Robinhood. Read more: Reddit day traders are taking on hedge-fund giants and winning, and it's a sign of a new era for markets. The rise of the retail investor trading is drawing comparisons to the s and the dot-com boom.
Why Use Bullish Options Strategies? Buying Simple Calls vs. Other Strategies
However, some experts believe a key differentiator between now and the s is the rise in option investing from retail investors. Read more: As Redditors flood the stock market, UBS breaks down 6 options strategies investors can use right now to protect their portfolios. Call volumes have been rising relative to puts over the last 10 months, with a peak occurring in August, Vivek said.
Since the US Presidential election, the firm is now seeing trading activity in single stock calls relative to puts increase again. Graph of single stock call options relative to put notional open interest from Goldman Sachs research note Goldman Sachs. Put options give their holder the right, but not the obligation, to sell an asset at a specific price within a specific time period.
Investors often use put options as a form of investment insurance to ensure losses do not exceed a certain amount. Calls give the buyer the right, but not the obligation, to buy a stock at a specific price within a specific time period. When an investor sells a call, this involves owning the stock while at the same time giving someone else the right to buy your holdings. When there are more puts than calls this tends to indicate a bearish outlook. On the other hand, more calls relative to puts demonstrates a bullish outlook.
Futures & Options Strategy Guide
In the research note, Goldman Sachs breaks down the top 50 stocks with high call open interest relative to puts over the past month. But despite this skyrocketing interest in call options, Goldman Sachs still sees four tactical trades investors can make this earnings season. Ticker: GM. Analyst comment: "GM one-month implied volatility of 58 is only 2 points above one month realized volatility. Call buyers risk losing premium paid if stock closes below strike price on expiration.
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Ticker: ORLY. One month implied volatility of 38 is only 3 points above one month realized volatility. Ticker: BLMN. Analyst comment: "BLMN one month implied volatility of 64 is only in the 36th percentile relative to the past year, implying little positioning ahead of earnings. One month normalized put-call skew is only at median levels relative to the past year, implying put prices are attractive, despite earnings-driven risks.
Put buyers risk losing premium paid if stock closes above strike price on expiration.
Ticker: MAT. Trade: "Buy straddles ahead of MAT earnings on Feb 9th; option prices are only inline with history, despite potential for a volatile report. Analyst comment: "MAT one-month implied volatility of 58 is only 3 points above its 1yr average. Implied moves are driven by options across strikes and terms, usually driven up by investors buying expensive out-of-the-money OTM options. This is the simplest use of options in a bullish market.
How to use options in in bullish market conditions - Motilal Oswal
A call option is a right to buy a stock or an index without the obligation to buy. That means you will pay the premium to get the right without the obligation. That premium is your option price and represents the maximum loss that you will incur in the transaction. Let us understand that better with a live example. In the above scenario it is clear that the break-even point for the naked long call option is Rs.
It is only after the price level of Rs. Below Rs. Above Rs. It is only post this point that he starts making profits. Trading bullish market with insurance via protective put strategy.. A protective put is also a bullish strategy but it comes with a built in insurance. The problem with buying naked options is that you end up paying a huge premium and more often than not it is difficult to recover the premium amount.
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An alternate strategy could be protective put where you buy futures and protect it by purchasing a lower put option. In the Reliance example, if you can buy Reliance Futures at Rs. But then your breakeven point is Rs. Remember, when you buy futures here is higher margin payable and also you are subject to payment of mark to market margins.
Options strategy
But this strategy essentially brings down your breakeven point. Moderately bullish strategy via covered call strategy.. What do you do if you are moderately bullish on a stock? In the Reliance case you do not Reliance to go up to Rs. In that case you buy Reliance Futures at Rs. This effectively reduces your cost of acquiring Reliance by Rs. On the upside you earn maximum profit on this strategy at Rs. After that whatever you gain on the futures is lost on the short call option.
But it needs to be remembered that this strategy has open risk on the downside below Rs. That is a risk you need to be conscious of. Moderately bullish strategy via Bull call spread strategy.. The downside of the covered call strategy is that the downside risk is open. That problem can be resolved using a covered call. This is also a moderately bullish strategy.