In the financial markets, you can have three opinions about price: bullish, bearish, and neutral. No matter the market, volatility, or news cycle, these three biases are the end products of market analysis.
Here’s a brief look at each type of market bias:
- A bullish bias is one that anticipates rising asset prices. If you’re bullish, you want to be long the market.
- A bearish bias is one that anticipates falling asset prices. If you’re bearish, you want to be short the market.
- A neutral bias is noncommittal. If you’re neutral, you don’t want to be long or short the market.
Let’s learn more about how you can use stock option trading strategies to cash in on your bullish and bearish market biases.
Bullish Stock Options Strategies
A stock option is a contract that gives the holder the right, but not the obligation, to buy (call) or sell (put) shares of stock at a specified strike price at some point in the future. Typically, a stock option contract is worth 100 shares.
Each option contract binds two parties: the holder and the writer. The holder pays a premium for call and put contracts; the writer receives the premium for honoring the option contract’s terms.
Two basic ways bullish shares traders can secure long-side market exposure via options is through buying calls or writing puts.
Basic bullish stock option trading strategies involve buying calls. When you buy a call, you secure the right to buy shares of stock at a specific strike price in the future. If price rises above strike at contract expiry, you make a profit. Profits are potentially unlimited.
When you write a put option, you assume the liability of market movements beneath strike in return for a premium. As long as a stock’s price remains above strike, the put option expires worthless, and the writer makes a profit. Be aware that options writers assume unlimited risk.
The functionality of options gives traders a collection of alternatives when securing long-side market exposure. Buying calls and writing puts are two of the most common bullish stock options trading strategies.
Bearish Stock Options Strategies
If you harbor a bearish bias toward equities sectors or an individual stock, options give you the opportunity to profit from falling prices. Two of the most popular are writing calls and buying puts.
Here’s a brief look at the functionality of each:
By buying a put contract, you secure the right to sell a block of shares at a strike price at some future point in time. If prices fall beneath strike, the trade is profitable. Put buyers enjoy potentially unlimited profit potential: As prices fall, gains increase.
When you write a call contract, you agree to buy a block of shares at a strike price at some future point in time. As long as price remains beneath strike, the contract expires worthless, and the writer holds on to the premium. However, the risk exposure is unlimited because the writer is liable for all price rallies above strike.
Buying puts and writing calls are popular bearish stock options trading strategies. Each offers the trader short-side market exposure and a chance at profiting from falling prices.
Want to Learn More About Stock Options Trading Strategies?
The four strategies above are only the tip of the iceberg. There are many more, all with a unique approach to capitalizing on equities market volatility. No matter if you’re bearish or bullish small-caps or techs, there’s a stock option that’s right up your alley.
To learn more stock options trading strategies, check out the free StoneX course “Options Strategies.” There, you’ll find in-depth tutorials teaching the ins and outs of covered calls, married puts, bull call spreads, and bear call spreads. Before you buy or sell another share of stock, be sure to enroll in “Options Strategies.”