Bullish Strategies

[00:00:00.19] - Speaker 1
At this point, we are ready to look at strategies using options. Let's start with the bullish ones. Bullish strategies allow us to gain on a bullish view on the underlying. The main ones are long call or buying a call option, short put or selling a put option. Then we have the bull call spread.

[00:00:16.34] - Speaker 1
This is a multi leg strategy that consists in buying a call and selling a call at a higher strike with the same expiration date. Finally, the bull put spread, which is a multi leg strategy that consists of selling a put and buying a put at the lower strike price with the same expiration date. If we are bullish on an underlying, we can go long stocks or implement option buying or selling strategies. Option strategies allow us to use leverage and manage our risk and expected return. Let's start with a long call.

[00:00:43.55] - Speaker 1
This is the simplest strategy and the building block of other complex strategies. Buying a call grants the buyer the right, but not the obligation to buy a security or underlying at expiration or before expiration at a given strike price. Each option contract gives the exposure to 100 shares of the underlying asset. So we buy a call if we have a bullish view on the underlying. If the spot price has gone up, we can exercise the contract and buy 100 shares of the underlying at less than the market value or resell the option contract at any time.

[00:01:13.36] - Speaker 1
The payoff chart shows the price of the underlying on the x axis at expiry and the profit and loss of the strategies on the y axis. The payoff of a long call can be calculated as the difference between the strike price and the price of the underlying at the time of expiration of the option option multiplied by the number of shares per contract, which is 100 shares. In this example, we bought an option contract with a strike price of $40 for a premium of $3. The cost of our option contract is $300, which is $3 times 100, which is the number of shares. Our maximum loss will be $300 if the price of the underlying is below our breakeven.

[00:01:49.13] - Speaker 1
At expiration, the breakeven price is $43, which is a strike price plus the cost of the premium of the option. If at expiration the price of the underlying is greater than 43, our strategy makes money. The maximum profit for a long call is potentially unlimited, as in theory, the price of the underlying could grow indefinitely. Even if that does not happen given the time to expiration. When we choose an option strategy, we need to know how the Greeks impact the price of the option.

[00:02:14.51] - Speaker 1
We talked about the different greeks during the course, in addition to the price of the underlying the delta and the gamma, it is important to understand the impact of vega or volatility and theta or the passage of time. In the case of a long call strategy, we are long options. Being long options, we benefit if the implied volatility rises and the theta effect is negative for our position. The more time passes, the more the option loses its time value. In the next slide we show you how to use the Q models to implement a long call strategy.

[00:02:43.56] - Speaker 1
Here you can find the main chart. The things we look at are the first of all, look at where the price is. Secondly, we look at the Greeks through the JAX and DAX indicators. We definitely want a bullish VAX and a bullish dex. Remember, long call benefit from a rise in volatility.

[00:03:01.32] - Speaker 1
Then we look at the implied versus historical volatility. We want to be option biased. When implied volatility is low. This will give us the best probability of success. Finally, we could use the main levels to select our strikes.

[00:03:14.44] - Speaker 1
We can then look at the NJAX chart in this case. Since we want a bullish movement, we want to see an increase in strikes to the upside. Possibly we want the levels we will use for our call to be sticky. Strikes are sticky when we see an increase in jacks which represents investor positioning. One thing to note is that the closer the strike it is to the price of the underlying or the spot price, the higher the cost of the call.

[00:03:39.11] - Speaker 1
To recap here we can see our checklist for a long call strategy. We want to see positive jacks, bullish, cumulative net jacks, bullish flags, sticky strikes for our call strikes and increase in call volumes. Now let's look at how to implement it by looking at the Q models. We could set the strike of the call by using the call resistance or a high volume level. We want the strikes above the core resistance to continue accumulating jacks.

[00:04:03.55] - Speaker 1
This is a sign of a bullish market. During the trade it would be ideal if the core resistance moves up. We also want to see an increase in implied volatility. Now let's look at the second bullish strategy which is short put or selling a put. By selling a put we have the obligation at expiration to purchase 100 shares of the underlying stocks from the buyer at the strike price.

[00:04:25.03] - Speaker 1
If exercised, selling a put is equivalent to going long 100 shares. Selling options is another way to benefit from the rise in the price of the underlying and has several advantages. By selling options we can generate income through premiums paid by the buyers who Buy the option, the option sellers collect the premium. We can also sell options to buy shares at a lower price. If we want to go long and underlying, we can buy the shares in the market or sell a put.

[00:04:51.58] - Speaker 1
By selling a put at a strike below the market price, we first collect the premium and have the option to buy at a cheaper price if the price of the underlying falls. Finally, by selling options, we can generate returns from non directional movement. We can generate profits if the price of the underlying stays within a price range. But selling options also comes with risks. Let's see the payoff of the strategy.

[00:05:15.07] - Speaker 1
When we sell options, we have limited profit potential which is represented by the premium received. Let's look at the payoff of selling puts. In this example, we have sold the put option contract with a strike price of $50 for $5 of premium. The premium received is $500, which is $5 times 100 shares. The premium also represents our maximum profit.

[00:05:36.09] - Speaker 1
If the price of the underlying at expiration will be higher than the strike price, the option will expire worthless and we collect the premium in full. The breakeven price is $45, which is calculated as the strike price minus the premium of the option. If at expiry the price of the underlying is lower than the breakeven price, our strategy starts losing money. Our maximum loss in this case is the difference between the breakeven price and zero multiplied by the number of shares. In fact, the price of the underlying can only fall to zero.

[00:06:04.48] - Speaker 1
When we decide to sell a put option, we must take into account some very important variables. The first one is implied volatility. If the implied volatility goes down, this will have a positive impact on the strategy as the premium will tend to decrease. The guideline for option trading is as Buy option when implied volatility is low and sell option when implied volatility is high, then we need to consider time decay. When we sell option, we have time or theta on our side.

[00:06:30.50] - Speaker 1
The option premium depreciates over time and it expires worthless if the option expires out of the money. Theta works in favor of the option seller. An important aspect when we sell options is the margin required by the broker when selling options. When we sell options, we need to have a margin which is the cash held by the broker as collateral to meet the commitment. The margin is released when the position is closed.

[00:06:53.47] - Speaker 1
The margin depends on the broker and can change according to the volatility and the price of the underlying. It's not a static value and can change over time. Now let's look at our checklist. We want to see a positive jax, a bullet cumulative jax, a bearish vex, a sticky strike above the ivor level and the increase in call volumes and decreased input volumes. Finally, how can we use the Q models to set up this strategy?

[00:07:17.47] - Speaker 1
We can use the put support level or the IVOL level as the strikes for our put. And we want to see a decrease in implied volatility during the trade. Now, let's talk about two other types of bullish, the bull call spread and the bull put spread. Spreads are widely used by investors who want to take an exposure with options by benefit from leverage by limiting the risk. They allow you to define a payout and a risk when you place the trade in the market.

[00:07:42.14] - Speaker 1
They are multi leg strategies that involve buying and selling options. Let's start with the bull call spread. The bull call spread strategy consists of the purchase and sale of call options with the same expiration but different strike prices. It's a strategy that involves buying an at the money or in the money call and selling an out of the money call. With a strike higher than the purchase call.

[00:08:02.21] - Speaker 1
The expiration of the options are the same. This strategy is similar of buying a call option with the difference that we add a leg that allows us to reduce the cost of the premium paid for the strategy. By selling a call, we collect the premium. The premium received for the sale of the second call allows us to reduce the cost paid for the purchase of the first. The cost of the spread is represented by the difference between the two premiums.

[00:08:25.26] - Speaker 1
A bull call spread is more bullish the more the strike of the sold call is out of the money. The bull call spread is a debit spread in the sense that this structure has a cost to the trader even if the cost is less than just buying a call option. The bull call spread has a payoff diagram with a defined risk and return from the time of purchase. Let's look at this example. We buy a call option with a strike of $60 and sell a call option with a strike of 65 at a premium of $2.

[00:08:51.34] - Speaker 1
Our breakeven price is represented by the strike of the purchase call plus the premium paid in this example $62. Our risk is also limited to the premium paid which is $200 or $2 times 100 shares. Unlike the long call, our profit has a limit which is represented by the difference between the two strikes minus the premium paid. In this case, the maximum profit is $300 if the price of the underlying rise is above the strike of the sold call or in this case $65. The previously out of the money sold call becomes in.

[00:09:24.26] - Speaker 1
In this strategy we are long options even though we have sold the call to reduce the premium. When we are long options, we must therefore evaluate the impact of the following. First, implied volatility. If the implied volatility rises, this will have a positive impact on the position as the premium will tend to rise. In theory, the traders should enter this strategy when the implied volatility is low.

[00:09:45.47] - Speaker 1
Then we have time decay. The theta factor is also negative for this strategy because it lowers the value of the purchase call. This is the checklist for this strategy. We want to see positive Jacks bullish Cumulative jacks bullish VAX price above the eyeball level Sticky strikes of the strikes where we buy the call and bullish call volumes. Now let's look at how to use the Q models to implement the bull call spread.

[00:10:10.36] - Speaker 1
For the long call strikes, we can use the call resistance or high volume level. For the short call strikes, we can use the second call resistance, for example. Now let's move to the last bullish strategy, the bull put spread. The bull put spread is a bullish strategy that has a limited maximum profit. The strategy benefits from the rise in the price of the underlying.

[00:10:32.26] - Speaker 1
It's a strategy that involves selling and at the money or in the money put and buying an out of the money put with a lower strike than the sold put. The expiration of the options are the same. In this case, we sell a put to collect a premium and we buy a put at a lower strike to limit the risk should the price of the underlying keep falling. This is a credit strategy as we receive the difference between the two premiums. The wider the spread between the put sold and the put purchased, the higher the premium or the credit that we will receive.

[00:11:00.20] - Speaker 1
Now let's look at an example. In this case, we sell a $90 strike put option and buy an $85 strike put option at a net credit of $1. We collect a credit of $1 and our maximum profit in this case is $100, which is $1 times 100 shares. Our breakeven price is represented by the strike of the put sold minus the premium received, in this case $89. The maximum loss in the event that the price of the underlying falls at expiration is $400 or the difference between the breakeven price and the strike price of the purchase put.

[00:11:33.47] - Speaker 1
In this example, $89 $85 times 100 shares. In this strategy we are short options even though we bought the put to reduce the risk, we need to then consider two implied volatility and time decay. If implied volatility falls, this will have a positive impact to the strategy as the premium will tend to decrease. The theta factor in this case is positive because it decreases the value of the puts sold. Now let's look at the checklist.

[00:11:59.48] - Speaker 1
We want to see a positive jax, a bullish cumulative jax, a bearish vex price above the eyeball level, and sticky strikes above the short put strike. Using the Q models, we can use the put support as the short put strike and the second put support as the long put strike. In the next lesson, we will talk about the bearish strategies.