A bull market can be a great thing for an investor. It can denote high returns on investment. That is, if the investor knows what to do in this situation. But first, you should know what a bull market means.
In the most basic definition, a bull or bullish market is where there is a rise or an expected rise in the prices. This is commonly used in the stock market but it can also define price increases in other trade markets as well such as gold, currency, bonds, commodities, and the like.
The market is primarily characterized by a general sense of optimism from investors. They have a heightened sense of optimism that the strong performance of the market will continue. However, it is very difficult to actually predict how long and how far this trend will go. For the most part, it is difficult because of the psychological effects this type of market has on investors. Speculation and trading with emotion will affect the market, which makes it that more difficult to consistently predict.
The term bull market is derived from the way the animal attacks its enemy. A bull would mainly use a forward, upward motion to thrust its horns against its target; the same motion the market price moves during this type of market.
A bull market is also the opposite of a bear market.
Based on the definition, since the market is going up, this means you, as an investor, can make good gains from it. But, similar to anything in this business, getting that good return lies heavily on the investor’s strategy and ability to execute.
One of the most common strategies in a bull market is to purchase calls. This is because an investor now has the ability to control more stock shares while risking less capital. You will be able to make a profit from purchasing calls because of the limited risk, high reward situation. The biggest loss you will encounter is the price you paid for the call. The main challenge to execute this strategy is the ability to accurately predict the rise of stock prices before the expiration date of the call.
Another strategy involving calls limits the rewards but also greatly limits the risk as well. This is done by purchasing at-the-money calls then you sell the same amount of out-the-money calls. You are able to limit the risk because you simply collect on the premiums.
You can also opt to sell naked puts. This is a higher risk strategy but of course the reward is better. You sell naked puts in the hopes that the stock prices would remain above the strike price so you can collect on premiums for selling the contracts. If you are able to predict the price properly and it does stay above the strike price, the contract would remain virtually valueless and you would be able to collect good returns on the entire premium.
Another strategy that is becoming quite popular is purchasing calls at a high strike price while you sell other calls at a lower strike price. The premium you would receive from selling the calls should be able to offset the purchase you have made. The profit is made when the price goes beyond the higher strike price.
There are a lot of other strategies out there that involve a bull market. You can do a lot when prices are going up. Again, the success of these strategies lies in your ability to properly execute them. Do not just take action just because you know these are the strategies done by successful investors, you still need to manage it properly and execute at the right times.