The directional trading strategies template allow users to determine the profit when buying options. This template focuses on directional strategies which bet on the direction of the market to create profit. These strategies usually include two options, one short and one long. The profit of the strategies depends on the spot price and the cost of the option premiums.
This template includes the following strategies :
- Bull Calls
- Bull Puts
- Bear Calls
- Bear Puts
Overview of Directional Trading Strategies
Directional trading strategies are bets that the underlying asset of the option will either increase or decrease. If an investor believes the asset will increase in price they will use bull strategies. If they believe the asset's price will decrease, then they will use bear strategies. The strategies combine a long and short position on either call or put options.
Investors create bull calls when they think the markets are good and will increase in price. They create this by buying a call option with a lower strike price and sell a call option with a higher strike price.
Bull put is also a bet that the markets are good and prices will increase. It is similar to bull calls but uses put options instead. Investors can create bull puts by buying a put with a lower strike price and selling a put with a higher strike price. A bull put will have lower loses in comparison with a long put when prices fall. However, it also caps the earnings of the option.
Bear call is based on the belief that market prices will fall. Investors or traders create this by selling a call with a low strike price and buying a call with a high strike price. Much like other directional strategies, the loss and gain of the option are limited. However, the reward to the strategy is that there is less volatility.
Similar to bear calls, bear puts create a profit when the market prices fall. Investors create bear puts by selling a put with a low strike price and buying a put with a high strike price. A bear put is cheaper than just buying a put option and decreases volatility. Since an investor is selling a put option, they can collect a premium to offset the cost of buying a put option with a high strike price.
Why does it matter?
Directional trading strategies template help investors limit their risk, decrease costs, and predict the cash flow with greater accuracy. Understanding directional strategies also help investors create more complex strategies. These strategies combine bull spreads and call spreads and bet on the volatility of the underlying asset.