Following the uncertainty caused by COVID-19 in 2020, many financial experts predicted 2021 would be a big year in the markets. The introduction of vaccines, unlimited Fed quantitative easing (QE), and massive government stimulus all pointed to economic recovery. In fact, during Q1 2021, investment banking giant Goldman Sachs projected U.S. GDP to grow by 8 percent for the year―a figure far eclipsing the pandemic-stricken -2.3 percent of 2020.
If Goldman Sachs is correct, then market participants are well advised to add long-call trading strategies to their financial plans. When executed correctly, long calls can produce big profits in northbound markets. Let’s take a look at three of these strategies that may produce significant gains throughout 2021.
What Is a Long-Call Trading Strategy?
A long-call trading strategy is the easiest way of securing bullish market exposure using options. When executing a long call, the trader simply buys a call option contract at a desirable strike price. A long call strategy follows this progression:
- The trader pays an up-front premium to buy the call contract. Premiums vary according to the contract’s asset, expiration date, and strike price.
- Upon payment of the premium, the call contract becomes active and subject to time decay.
- If price rallies above the trade’s breakeven point (strike + premium) ahead of contract expiration, then the trade is profitable. If not, the call contract expires worthless, and the premium is lost.
Long calls are ideal when a trader believes that a market is going to rally significantly over a period of time. If correct, buying in-the-money (ITM), out-of-the-money (OTM), and at-the-money (ATM) calls can generate extraordinary profits.
Strategy No. 1: Long Equities
The performance of the U.S. stock market from March 2020 to March 2021 was nothing short of astounding. Values of the DJIA, S&P 500, and NASDAQ each rallied more than 70 percent in the 12 months following March 2020’s COVID-19 panic lows. Multiple trillions in government stimulus and unlimited Fed QE promoted the prolonged strength in risk assets.
To gain bullish exposure to U.S. equities for 2021, executing long-call trading strategies is a viable plan. During the early portion of Q2 2021, a trader could buy December ATM calls of the E-mini DOW (strike@33,000), E-mini S&P 500 (strike@4,000), E-mini NASDAQ (strike@13,500), or E-mini Russell 2000 (strike@2,200).* If the bull run in stocks continues through 2021, the December ATM calls are extremely likely to close deep into the green.
*Strike prices approximated as of April 8, 2021.
Strategy No. 2: Bullish Energies
As the old saying goes, “Crude oil is the lifeblood of economic activity.” So, during periods of enhanced growth, the demand for crude oil increases. Given the introduction of COVID-19 vaccines and the pending reopening of the global economy, a significant uptick in year-over-year crude oil demand is probable.
To execute a long call in the crude oil markets, you could target the peak consumption season of refined fuels. By buying OTM September WTI calls with a strike of $60.00*, you would secure a bullish crude oil position. If WTI rallies to $70 or the psychological barrier of $75, the $60 calls will expire in the money.
*As of this writing (April 8, 2021), a strike of $60.00 for September WTI is an OTM contract.
Strategy No. 3: Buying Corn or Soybeans
During the first year of the COVID-19 pandemic, the U.S. dollar (USD) experienced dramatic highs and lows. During the initial onslaught of COVID, the USD became a fortified safe haven, but amid Fed quantitative easing (QE) and government stimulus, the USD tanked versus the global majors. Given the outlook for 2021, few analysts expect the dollar to rebound.
One way to hedge against a falling dollar is to buy ag commodities. For 2021, the February USDA projections suggest that both markets may show strength as the year wears on. In the case of corn, greater domestic use and exports are positive factors that can support prices. On the other hand, an increased soybean crush and a historically low stocks-to-use ratio may boost values.
To execute a long-call trading strategy for corn or soybeans, the following courses of action are ideal:
*Strike prices are approximated as of April 8, 2021.
Make 2021 a Profitable Year with Options
The onset of the COVID-19 pandemic shook the foundations of finance, creating both unprecedented opportunity and risk. For those trading from a solid foundation, the wins outweighed the losses, but for those that built on sand, the pain was evident.
If your 2020 was sub-par, then perhaps it’s time to reinforce your trading foundation for 2021. A great place to get started is with Daniels Trading’s webinar “5 Concrete Tips to Build Your Solid Trading Foundation.” The webinar offers indispensable tips on how to develop a positive and successful trading mindset.