Understanding
Stock Options Trading
and Technical Analysis Basics

Bullish Option Strategies

The strategies on this page are considered bullish, as the maximum profit is obtained if the underlying stock goes up in price. These trades are usually placed with an expiration date in the near future. Therefore the underlying stock will need to go up in the short term.

However, you can open a trade with a longer expiration date, but the options become more expensive due to the options' higher time value. This will cause these trades to be less profitable, or require the underlying stocks to increase in price by a larger amount in order for the trades to break even and become profitable.

Click the links for each strategy in order to see more detailed descriptions and examples.

 

Call Backspread

A Call Backspread is created by buying 2 out-of-the-money calls and selling 1 in-the-money call, earning you a net credit premium. It is meant for stocks that are high volatility and bullish. You earn unlimited profit if the stock climbs. If the stock falls, you get to keep your original net credit premium. If the stock price doesn't move, you will incur a loss.

Call backspread composite

Covered Call

A Covered Call is created firstly by buying or holding on to an existing underlying stock. You then sell or "write" a call option that is either at-the-money or just out-of-the-money, earning an initial premium.

At expiration date, if the underlying stock's price ends below the call option's strike price, you get to keep the initial premium as well as the underlying stock. You can keep doing this to earn the premium each month. If however the underlying stock's price ends up above the call option's strike price, you are called out, and must sell the stock at the strike price. You earn the initial premium as well as whatever capital gains from selling the stock.

Covered Call components

Long Synthetic

Call and put Synthetics involve buying a call and selling a put at the same strike price, or vice versa. A long synthetic is a bullish strategy and involves buying a call and selling a put. It has unlimited profit as the stock price climbs, and unlimited loss as the stock price falls. Since options are sold, this position needs to be closed before expiration.

Long synthetic composite

Married Put

The Married Put position is a form of insurance or hedging to protect your investment in the underlying stock. It is created by buying the underlying stock, and also buying the associated put option at any strike price of your choice. The number of put options and the strike price will depend on how likely and how far you think the stock price is likely to fall. Buying more options and at a lower strike price will give you more protection. However, this protection comes at an increased initial cost due to the higher price paid for the option premiums.

Married Put, Protective Put composite