Call option strategy

Buy naked call option

• When investors have high confidence of the upward trend of stock prices in a certain period of time in the future, they can buy call options to obtain greater returns. The following describes the options for different time levels.

‍

• Day trading: 

• 1. Intraday traders make use of small-level fluctuations in stock prices to earn profits, and should choose options with high delta values; if the delta value is too low, stock price fluctuations cannot bring profit to day traders.
• 2.Usually short-term (1-2 week expiry date) in-the-money options have high delta values. When the delta value is higher than 0.6, it can respond quickly to small stock price fluctuations.

‍

• Short-term trading

• 1. When investors determine the upward trend of the underlying object in the short term (1-2 weeks), they will also choose the high delta option used by intraday traders. But the expiration date can be appropriately extended to reduce risk of stock prices falling.

‍

• Midline trading

• 1. When investors extend the trading cycle, in mid-line trading, options with low delta values ​​should be used, that is, options with a longer expiration date.
• 2. Investors speculate that the stock price will increase significantly in a few weeks and months. At this time, buying an at-the-money option with low delta value can achieve better returns

‍

• Long-term trading

• 1. Under normal circumstances, the risk of buying out-of-the-money options is high, but when the time period is very long (greater than 9 months or more), you can consider options with slightly out-of-the-money values, and exchange lower premiums for larger returns. 
  

Sell ​​a call option (Covered call)

• When investors hold 100 shares or more of a specific stock, they can sell call options on that stock.
• The maximum profit is the difference between the stock's exercise price and the stock price plus the premium for selling call options.

‍

• Risk

• 1. When the stock price rises above the exercise price, it will be automatically exercised, and the part of the stock price that exceeds the exercise price cannot be obtained.
• 2. When the stock price continues to fall, selling the call option will cause the corresponding stock of the option to be locked and the stop loss cannot be sold before the expiry date. The maximum loss is the stock price minus the premium received by selling the option.

‍

• For long-term stockholders, when the stock price drops, the option premium can make up for part of the loss of the decline, and can also increase the income of stockholders.
• When the stock price rises significantly, the profit of selling call options will be smaller than holding stocks. Therefore, it is not recommended to participate in selling call options when the stock is in a sharp upward trend.
  

Bull spread

• Spread options refer to buying and selling options on the same expiration date. Bull market spread options are usually used in conservative and bullish situations to reduce costs

‍

• There are two strategies for bull spread options

• 1. Debit spread: Buy a low-priced call option and sell high-priced call options on the same expiration date. When the stock price exceeds the exercise price of the high-priced option, the maximum profit can be achieved; the maximum profit is the difference between the two options exercise price multiplied by 100 Subtract the premium paid for purchasing this strategy.
• 2. Credit spread: buying a low-priced put option and selling high-priced put options on the same expiration date. When the stock price closes at the exercise price of the high-priced option, the maximum return can be reached; the maximum return is the income from trading the spread option (Credit). 

‍

• Examples of advanced usage scenarios:

• 1.The buyer holds a call option with an exercise price of $20 for X stock that expires in January. When the stock price is $22, the buyer buys this option with $300 ($3 per stock value). But now the stock price drops to $18, this option only worths $150 ($1.5 per stock value). As a remedy of losses, the buyer then sells two call options for X stocks that expire in January with an exercise price of $20, and at the same time purchases an option for X stock that expires in January with an exercise price of $15. At this time, the buyer’s holding position is a long call option of $15 in January and a short call option of $20 in January. This combination is called a bull market spread option.
• 2. The original strategy (one naked call  option with an exercise price of $20) will require the stock price reaching $23 to maintain a breakeven at maturity date. Under the bull spread strategy, the stock price only needs to reach 18 yuan on the maturity date to be able to balance the cost.
  

‍