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Three times the Options

Author: Patrick Nelson/Wednesday, December 6, 2017/Categories: Mikes Blog

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Typical equity investors and traders have a simple and effective strategy; buy shares low, and sell them high. This is a great strategy for bullish markets, just as a hammer is great for hammering in nails.

As a trader of Exchange Traded Options (ETOS’s) you need the right tools to tailor a trade to whatever your view of the market or a particular stock is.

So let’s compare how 3 different bullish strategies may play out against different market views.

View 1 – I’m confident the stock is going to rise quickly over the next few days.

View 2 – I’m confident the stock will rise, but may do so slowly over the next few weeks.

View 3 – I have a Bullish outlook, but very confident the stock isn’t going to drop   below a certain point over the next month or so.

I am going to give you a quick overview of a strategy for each of these views.

View 1 - Call Option

A Call option; can be used to take advantage on stocks that are rising quickly. They are uncapped to the upside but have limited risk.

With a Call option, your risk is limited to what you pay to buy the Call option.

View 2 - Bull Call Spread

A Bull Call Spread can profit from both the stock rising and going sidewards. This flexibility allows time for the bullish movement to occur whilst still profiting. Both the risk and profits are capped.

View 3- Bull Put

A Bull Put Spread can make profit from the stock moving in multiple directions. Maximum profit can be achieved when the stock price goes up, sideways or even falls slightly. Profit and Risk is also capped on this strategy. 

Comparing the Three

The Call option provides the most profit when a share price rises in the short term. The Bull Call Spread can do well when there is an upward share price movement and benefits if the share price goes sideways. The Bull Put spread will make less than the other strategies on bullish movement, but can profit from a wider range of scenarios including the stock falling to a point.

Ultimately, understanding these strategies and applying them to suit your specific view can provide a significant edge in trading the market.

If you’d like to learn more, Traders Circle will be running a special webcast teaching these strategies in detail, and showing you how to enter them into an options calculator.

Click here to book in.

Patrick Nelson - CEO OzFinancial & TradersCircle

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