Trading options can be very profitable and this is why people jump into trading them, even without knowledge of option trading strategies. There are a wide array of strategies that can be used and they can maximize returns and limit risk. With a little effort, you can take advantage of the power and flexibility that different option strategies have to offer. With this in mind, here are two strategies every trader can use. The bull call spread and the bull put spread.

Bull Call Spread

One of the most commonly used options trading strategies is the bull call spread and is perfectly suitable for beginners as it is quite simple. It is used primarily when the outlook is bullish and the asset’s price is expected to increase by a fair amount.

How to Trade a Bull Call Spread

Two simultaneous transactions have to be implemented in this trading strategy. You purchase calls at a specific strike price and an equal number of calls are sold at a higher strike price. The underlying asset and expiration of both call options are the same. It creates a debit spread as you are spending more than you get. The purpose of writing the calls and buying them simultaneously is to reduce the cost of the position. Deciding what strike price to use is the most important factor when putting this spread. The higher the strike price, the more profits you can make.

Advantages

The biggest benefit that traders can enjoy when they use the bull call spread is that they essentially bring down the cost of entering a long call position because they enter into a short call position at the same time. While doing so may restrict your potential profits, but it does allow you to control how much you can make by selecting the strike price of the contracts. This means you have the possibility of earning a bigger return on your investment than you would if you simply buy calls. Plus, it will also cut down your losses if there is a fall in the value of the underlying security. It is a very straightforward strategy, which is appealing to many traders, and it also tells you how much you stand to lose when you are putting the spread on.

Bull Put Spread

A Bull Put Spread is nothing else than a Bull Call Spread, just built with puts. Because it has negative prices (short put high base price is more expensive than long put low base price), you usually go there and don’t buy at minus prices, but sell a bear put spread! The bear put spread is in principle the bull put spread but with reversed signs. If you sell a bear put spread, you get a bull put spread as a result! You first take the profit and have the same risk as with a bull call spread (provided you use the same base prices). The advantage over the bull call spread, however, is that the popular exercises (preferably before a dividend date) of call options in the money are avoided! This is because a put is not exercised if the share price is above the strike price of the put. Basically, the Bull Put Spread is as easy to build as the Bull Call Spread and has the same profit and risk limit parameters. Only the theory is more complicated.

How to Trade Bull Put Spread

As before, you need two simultaneous transactions for creating this spread. You have to rise puts depending on the underlying security that you expect to increase in price and based on that security, you buy the same number of puts. It is vital to ensure that you choose a higher strike price for the puts that you write as compared to the puts you buy as they will be more expensive. In this way, you will be able to create a credit spread and get upfront credit. The expiration date of the options that you write and the ones you buy should be the same.

Advantages

This spread offers two main benefits. Firstly, you still earn a profit even if the price of the underlying security doesn’t go up. Even though this means that the puts you have bought will expire worthlessly, the same will apply to the ones you have written and so you can keep all the upfront credit. The second benefit is that when you buy them out of the money puts, you can reduce or restrict your potential losses. This comes at a cost and reduces the size of your credit because you have written more expensive puts, but it provides an extra level of protection, which can be very appealing. You can use either of these strategies for trading options, depending on whether you are a beginner or experienced trader.

Important: With both strategies, you can achieve high double-digit percentage gains without having to increase the underlying stock. On the contrary, it may even fall to the strike limit! Which trading strategy are you currently using? Please leave your comment below. Feel free to share this article on social media.