You’re bullish on AAPL. What kind of trade should you put on to express that bias?
Traders have a host of options (pun intended) to make a bullish play.
You could buy shares and hope you timed the market right. Or, you could choose from multiple options strategies to capitalize if Apple’s price rises.
For example, you could buy a long call or call spread to speculate on AAPL’s future price movement. You could also sell a bullish put spread and collect a premium in the process.
Each strategy has different risk/reward profiles and responds differently to AAPL’s changing stock price.
You don’t have to just pick a strategy and hope for the best. With Option Alpha’s backtester, you can analyze and compare different strategies, allocations, entry and exit criteria, timeframes, and more to find the best fit for you and your portfolio.
Keep reading to explore three simple strategies that profit if AAPL’s price increases. We’ll also backtest a version of each strategy and share the results.
Bullish Options Strategies
Once you’ve established a bullish outlook, you need to ask yourself a few questions:
- What is your timeframe?
- What is your preferred risk to reward and probability setup?
- What is the underlying symbol’s implied volatility?
- Does time work for you or against you?
- What strategy type best fits your outlook?
- What performance metrics are most important to you?
- What is the optimal capital allocation for your account size?
- What strategy type best aligns with your goals?
These questions are a great starting point before entering any position. Once you have your answers, you can then backtest specific strategy types and settings based on your expectations.
Backtesting can help uncover what strategy to use in different market conditions, the pros and cons of each strategy, and which setup best matches your risk tolerance and outlook.
We backtested three AAPL bullish options strategies: a long call, long call spread, and short put spread. The results illustrate potential benefits and drawbacks for each strategy type.
All strategies used a $10,000 account and allocated 3% to each position. Trades were entered sequentially, meaning a new position was opened as soon as the previous position closed, if capital was available.
Backtest results are not financial advice. Instead, they are a powerful research tool to compare different strategies using historical, quantifiable data.
AAPL Long Call Backtest Results
Long calls are a less expensive alternative to buying stock to speculate on bullish price action because they are a levered instrument. One options contract is equivalent to 100 shares of stock.
Long calls have defined risk. The debit paid at trade entry is the maximum possible loss for the position.
Long calls have a few key components working against them, however. Theta is always a headwind of single-leg long options because time value, or theta, decays every day.
Long calls require good timing to be profitable. Unlike stocks, options contracts have an expiration date, and the underlying security must be above the strike price to realize a profit.
Implied volatility is also an important factor when considering an options strategy. Declining volatility negatively impacts long options because lower volatility means lower option premiums. Likewise, long calls benefit from increasing volatility.
The backtester gives you a wealth of information within moments. You can easily browse the complete list of P/L stats, performance ratios, position metrics, and position averages for each strategy type.
AAPL Long Call Spread Backtest Results
Long call spreads, also called bull call debit spreads or debit call spreads, are an extension of a simple long call option. A long call debit spread is created by selling a call option above the long call with the same expiration date.
Selling the higher strike price call option brings in credit and reduces the cost of the combined position. However, this limits the profit potential to the spread’s width minus the debit paid. The max risk is still defined by the position’s cost.
Long call spreads are a net debit position, so declining volatility and time decay work against the position’s success, though not nearly as much as a long call. At expiration, AAPL’s price must still be above the long call’s strike price by at least the cost of the position to realize a profit.
You can see that the long call spread did not perform as well as the long call, despite a much higher win rate. This can likely be attributed to long call spread’s limited profit potential and long call’s ability to realize larger gains with relatively low risk.
AAPL Short Put Spread Backtest Results
Short put spreads, also called bull put credit spreads or credit put spreads, are an options selling strategy. Bull put spreads have limited profit potential and defined risk. The premium you collect is the most you can make on the trade.
Unlike the debit strategies discussed above, theta works in favor of put credit spreads. The passing of time helps the position, and if the underlying strike price is above the short put, the position can profit quickly as expiration approaches.
Traders selling credit spreads generally prefer high implied conditions to gain an edge. Decreasing volatility helps the position realize a profit.
In the backtester, you can input specific implied volatility values to observe its affect on the position’s success.
You don’t have to rely on direction and timing as much with short put spreads compared to long calls and call debit spreads.
For example, you can set up the position out-of-the-money and still profit if AAPL’s price moves sideways or slightly lower.
Learn how you can use delta to identify high probability trades.
The AAPL short put spread had the highest win rate and return on capital of all three strategies but also the worst loss.
Comparing the Results
One of the Backtester’s best features is the ability to. You can compare different tickers, strategies, position settings, and allocations.
Below are the complete backtest results comparing a long call, long call spread, and short put spread on AAPL.
All tests assumed the same starting capital and risk per trade. Position details such as days until expiration, option leg deltas, IV rank, and exit criteria are not included in the results.
All three strategies were profitable and had similar performance metrics. This makes sense because AAPL was in an uptrend for the backtest’s ten-year duration.
What’s essential to determine is which strategy best fits your goals, risk tolerance, and investment psychology.
For example, the long call had a very low win rate, despite being just as profitable as the multi-leg strategies. But could you handle losing on 80% of your trades?
This blog is meant to help highlight the importance of backtesting strategies, so you know what your expected performance should look like (although past performance is not indicative of future returns).
The ability to backtest multiple strategies simultaneously gives you a whole new dimension when evaluating your different options.
Using the Backtester for Options Strategies
The backtester lets you customize a strategy’s inputs with expiration timelines, specific delta values for each leg, minimum and maximum IV rank filters, and profit taking and stop-loss exit triggers. Plus, you can test up to three allocation setups for each strategy.
You can tweak a strategy’s inputs to optimize backtest results. This blog on SPY put credit spreads explores the power of backtesting different parameters to find the best settings.
You can also to find top-performing backtests using 13 different performance metrics. You can filter by ticker, strategy type, allocation, and more.
For example, you can easily filter for bullish AAPL strategies with the best return on risk (or CAGR, win rate, profit factor, Sharpe ratio, and more).
The best part? With automated trading, you can quickly create a bot from any backtest.
