Options Trading Strategy: Bull Spread

When discussing Options, many initially think of their complexity and the difficulty in understanding them compared to the simpler Futures contracts.

Fundamentally, speculators trading derivatives base their decisions on predicting the future direction of the underlying asset. In Futures trading, if one expects the asset to rise, they open a Long position; if expecting a decline, they open a Short. However, Options differ: opening a Long position means buying the right, while opening a Short means selling the right. Even so, this alone does not clarify the expected direction of the underlying asset.

To begin understanding Options, one should know there are two types of rights: the right to buy (Call Options) and the right to sell (Put Options). This means if an increase in the underlying asset price is expected, one would buy a Call Option (Long Call).

Conversely, if a decline is anticipated, one would buy a Put Option (Long Put). This illustrates a key difference between Options and Futures trading.

The basic Options strategies consist of four types:

1. Long Call
2. Long Put
3. Short Call
4. Short Put

According to the Futures and Options team at Bualuang Securities, Options trading strategies extend beyond these basics, offering a wide range to suit different market situations. The following sections will delve deeper, starting with the Bull Spread strategy, which suits a view that the underlying asset will rise moderately. Both profit and loss are limited. This strategy can use either Call or Put Options.

Figure 1: Bull Spread Strategy Payoff

Bull Call Spread

The Bull Call Spread strategy is constructed by buying (Long) Call Options at a lower strike price while simultaneously selling (Short) Call Options at a higher strike price, with equal contract quantities. Typically, the lower strike Call is At-the-Money, while the higher strike Call is Out-of-the-Money. Both Calls must have the same underlying asset and expiration date.

Example Mr. A expects the SET50 index to rise, so he adopts the Bull Call Spread by going Long on S50U26C1070 at 30 points and Short on S50U26C1100 at 16 points, one contract each (excluding fees).

The net premium paid equals (30 – 16) = 14 points, or -2,800 baht.

From this strategy, we observe:

• The maximum loss is 2,800 baht, representing the premium paid, occurring if the SET50 index is below 1,070 points (the lower strike price).
• The maximum profit is 3,200 baht, realized when the SET50 index is above 1,100 points (the higher strike price).
• The breakeven point for this strategy occurs when the SET50 index is above 1,084 points, calculated as the lower strike price plus the net premium paid (1,070 + 14).

Bull Put Spread

The Bull Put Spread strategy involves selling (Short) Put Options at a higher strike price and buying (Long) Put Options at a lower strike price, with equal contract quantities, the same underlying asset, and expiration date. This strategy anticipates the underlying asset price will remain above the strike price of the short Put. It also generates a net cash inflow because the premium received from the short Put exceeds the premium paid for the long Put.

Example Mr. C expects the SET50 index to rise and selects the Bull Put Spread strategy by Shorting S50U26P1100 at 39 points and Longing S50U26P1070 at 24 points, one contract each (excluding fees).

The net premium received equals (39 – 24) = 15 points, or 3,000 baht.

From this strategy, we find:

• The maximum loss is 3,000 baht, calculated as the difference between strike prices minus the net premium received, or (1,100 – 1,070 – 15) x 200.
• The maximum profit is 3,000 baht, realized if the SET50 index stays above the strike price of 1,100 points, equal to the premium received.
• The breakeven point occurs at 1,070 points, calculated as the higher strike price minus the premium received (1,100 – 30).

This concludes the Bull Spread strategy, suitable for a moderately bullish outlook on the underlying asset. It can be implemented with either Call or Put Options, differing in that Call Options require paying a premium, whereas Put Options result in receiving a premium.

Additionally, this strategy reduces costs due to the short options component compared to simply going Long Call, but it also limits potential returns. The next article will introduce the Bear Spread options trading strategy. Please stay tuned.

For traders interested in learning more about Options, they can open an account with Bualuang Securities with the following details:

How to Open a Futures Trading Account

Bualuang Securities clients can easily apply online through two channels:

1. Via the Wealth Connex app (Menu > Solution > Futures Trading Account)

2. Via the Streaming app (Menu > BLS > Futures & Options > Open Account)

General public can open an online stock account quickly via the Wealth Connex app, then apply for a futures trading account online following the above steps. For more information, click here.https://www.bualuang.co.th/article/opentfexaccountbywealthconnex

Read stock and investment news with Thairath Money to help you achieve “Good Finance, Good Life” athttps://www.thairath.co.th/money/investment

Follow the Facebook page: Thairath Money at this linkhttps://www.facebook.com/ThairathMoney