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Bull Call Spread: How this Options Trading Strategy Works

bull call spread strategy

Bull call spreads may also require a sizable market move to turn a profit. Because of this, it may be best to only consider using a bull call spread when a substantial move is expected. Another potentially good place to initiate a call spread is when a market declines into previous support levels or pulls back within a larger uptrend. For a market that has been beaten down and declined to levels where it previously found buyers, bargain hunters could step in and fuel a reversal back to the upside. Note, however, that the stock price can move in such a way that a volatility change would affect one price more than the other.

The effects of changes in the underlying asset’s price, volatility, and time decay also play a crucial role in the strategy’s outcome. A bull call spread is an options trading strategy used when a trader expects a moderate rise in the price of an underlying asset. It involves buying a call option at a specific strike or exercise price and selling another call option on the same asset at a higher strike price, both with the same expiration date. The goal is to profit from a moderate price increase, with the maximum profit achieved when the asset’s price is at or above the higher strike price at expiration. A bull call spread is a popular options trading strategy that involves buying a call option at a lower strike price and simultaneously selling a call option at a higher strike price.

ASSIGNMENT RISK

The maximum loss is the net premium paid for the options (i.e., the cost of the call option bought minus the premium received for the call option sold). You could then buy a call option on 100 shares of ABC Corporation for $5 per share, for an outlay of $500, at a strike price https://www.bigshotrading.info/ of $53. At the same time, you sell a call option on 100 shares of ABC Corporation at a strike price of $56 for $4 per share, so that you receive $400 from the buyer. This way, you have defrayed your $500 initial investment, so that your net initial investment is $100.

Traders often jump into trading options with little understanding of the options strategies that are available to them. There are many options strategies that both limit risk and maximize return. With a little effort, traders can learn how to take advantage of the flexibility and power that stock options can provide. This profit would be seen no matter how high the SPX index has risen by expiration. The downside risk for the bull call spread purchase is limited entirely to the total $275 premium paid for the spread no matter how low the SPX index declines. Breakeven, before commissions, in a bull put spread occurs at (upper strike price – net premium received).

Bull Call Spread Options Strategy

This strategy consists of buying one call option and selling another at a higher strike price to help pay the cost. The spread generally profits if the stock price moves higher, just as a regular long call strategy would, up to the point where the short call caps further gains. A bull call spread, also known as a long call spread or a vertical spread, is an options trading strategy used to capitalize on moderate price increases for a stock. The strategy has two legs and involves writing one option and buying another. In the P&L graph above, notice that the maximum amount of gain is made when the stock remains at the at-the-money strikes of both the call and put that are sold.

In reality, it is unlikely you will always achieve the maximum reward. Like any options strategy, it’s important to be flexible when things don’t always go as planned. And you have a moderately bullish outlook looking ahead, then it makes sense to invoke a Bull Put Spread for a net credit as opposed to invoking a Bull Call Spread for a net debit. Personally I do prefer strategies which offer net credit rather than strategies which offer net debit.

The Impact of Time on a Bull Call Spread

Additionally, Jorge sells an out-of-the-money call option for a premium of $2. The strike price for the option is $180 and expires in January 2020. The bull put, on the other hand, limits profits to the difference between what the trader paid for the two puts—one sold and one bought.

  • For example, this strategy could be a wager on news from an earnings release for a company or an event related to a Food and Drug Administration (FDA) approval for a pharmaceutical stock.
  • Before using this strategy, investors should carefully consider their risk tolerance and overall investment goals.
  • For example, suppose an investor is using a call option on a stock that represents 100 shares of stock per call option.
  • This is because the option has less time to make a profitable move, thus it is less valuable.
  • As time passes, all else being equal, the value of the option that is bought decreases.
  • Both call options will have the same expiration date and underlying asset.

No matter what happens, a trader can not lose more than their premium paid. Regardless of the theoretical price impact of time erosion on the two contracts, it makes bull call spread strategy sense to think the passage of time would be somewhat of a negative. If there are to be any returns on the investment, they must be realized by expiration.

Based on this example, it would be $50, which is the strike price of the bought call, plus $2, which is the net premium paid. In the Bull call spread, you need to buy one In the money call option which is 325 and premium paid is 23.55 and sell one out of the money call option which is 335 and premium paid is 19.2. For one, you can’t be absolutely certain that the buyer of the short option will not exercise against you. In case the buyer exercises their call option, you would have to make good on it and come up with the shares.

  • For this strategy to be executed properly, the trader needs the stock to increase in price in order to make a profit on the trade.
  • If the stock price is near or below the price of the long call (lower strike), then the price of the bull call spread declines (and loses money) as time goes on.
  • It is one of the four basic types of price spreads or “vertical” spreads, which involve the concurrent purchase and sale of two puts or calls with the same expiration but different strike prices.
  • Looking for a steady or rising stock price during the life of the options.
  • The maximum profit in this strategy is the difference between the strike prices of the long and short options less the net cost of the options—in other words, the debit.

In my view this is a fair deal considering you are not aggressively bullish on the stock/index. It is also known as a “long call spread” and as a “debit call spread.” The term “bull” refers to the fact that the strategy profits with bullish, or rising, stock prices. The term “long” refers to the fact that this strategy is “long the market,” which is another way of saying that it profits from rising prices. Finally, the term “debit” refers to the fact that the strategy is created for a net cost, or net debit. Conversely, a credit spread is an options strategy where the premium received from the short option is greater than the premium paid for the long option.

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