ABC is currently trading at $54 so you buy a call at 50 for $300 and write a call at 56 for $100. Losses are also capped, in this case by the debit taken when you execute the trade. For a market that has been trending higher on the longer time frames, a pullback into a support level may provide an opportunity to get long the market before it resumes the trend higher. In this case, the $38 call is in the money by $0.50, but the $39 call is out of the money and therefore worthless. In this case, the $38 and $39 calls are both in the money, by $1.50 and $0.50 respectively.
The bull call spread is a two leg spread strategy traditionally involving ATM and OTM options. However you can create the bull call spread using other strikes as well. When the stock is above the short call, theta benefits the trade as the position moves closer to the maximum gain each day.
When to use Bull Call Spread strategy?
In writing the two options, the investor witnessed a cash outflow of $10 from purchasing a call option and a cash inflow of $3 from selling a call option. Netting the amounts together, the investor sees an initial cash outflow of $7 from the two call options. Selling or writing a call at a lower price offsets part of the cost of the purchased call. This lowers the overall cost of the position but also caps its potential profit, as shown in the example below.
- Generally speaking in a bull call spread there is always a ‘net debit’, hence the bull call spread is also called referred to as a ‘debit bull spread’.
- Your $450 call’s value would surge to $8, and the sold $455 call would carry a $3 intrinsic value.
- The trader then decides to set up a bull call spread to profit from this expected price increase.
- It is an efficient way to participate in a security’s potential upside if you have limited capital and want to control risk.
- To execute the strategy, you purchase the underlying stock as you normally would, and simultaneously write—or sell—a call option on those same shares.
- Having a visual like the graph above clearly shows that is meant by “spread”.
In order for a rational options trader to buy just a call, the option trader has to expect a stock move greater than 10% within 30 days. However, successful option traders https://www.bigshotrading.info/ generally focus on probabilities and take into consideration reality. In percentage terms, the bull call spread is 30% cheaper than purchasing only the call option.
Which Options Strategies Would Be Considered Most Bullish?
Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. As with any trading strategy it is extremely important to have a forecast. 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.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money. The following is the profit/loss graph at expiration for the Bull Call Spread in the example given on the previous page. Moreover, if the trader is exceptionally bullish and thinks the stock will move up to $60, then the trader should just buy a call rather than purchase a Bull Call Spread.
Which Options Strategies Can Make Money in a Sideways Market?
When the stock is below the lower call, theta hurts the trade as the more time passes the closer the trade gets to the maximum loss. In this case, you suffer the maximum loss which is the $200 net debit you paid when you first executed the position. As an example, imagine you come across a stock (ABC company) that you believe is going to increase in price soon, so you decide to use a bull call spread strategy. This means the strategy has limited risk as well as limited profit potential and is generally used when the market is in an upward trend. The cost to put on a bull call spread may be considerably less when compared to the cost of holding an outright long position in the stock or contract. This strategy becomes profitable when the stock makes a large move in one direction or the other.
This is because at expiration, if the stock price is anywhere below $52.50, whether it be $20 or $52.49, the spread strategy will expire worthless. Also, the trader will sell the further out-of-the money call strike price at $55.00. By selling this call, the trader will receive $18 ($0.18 x 100 shares/contract). You decide to buy a $450 call option that’ll expire in a month, costing a $14 premium. At the same time, you sell a $455 call option (with the same expiration) for a $6 premium.
Bull Call Spread Strategy
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. The maximum loss is only limited to the net premium (debit) paid for the options. Because you are buying one call option and selling another, you are “hedging” your position. You have the potential to make a profit as the share price rises, but you are giving up some profit potential—but also reducing your risk—by selling a call. One advantage of the bull call spread is that you know your maximum profit and loss in advance.
A bull spread is an optimistic options strategy designed to profit from a moderate rise in the price of a security or asset. Whether a put or a call, the option with the lower strike price is bought and the one with the higher strike price is sold. The maximum profit in this strategy is limited due to the call option contract being sold at a higher strike price. It can be calculated by subtracting the net premium paid from the difference between strike prices bought and sold.
The Construction of a Bull Call Spread
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. They work best in markets where the underlying asset is rising moderately and not making large price jumps. A bull put spread is also called a credit put spread because the bull call spread strategy trade generates a net credit to the account when it is opened. Given the expectations in the hypothetical scenario, the trader selects the $52.50 call option strike price to buy which is trading for $0.60. Your $450 call now has a $4 intrinsic value, while the $455 call you sold is null and void.
- For example, if you are of the view that Nifty will rise moderately in near future then you can Buy NIFTY Call Option at ITM and Sell NIFTY 50 Call Option at OTM.
- The bull put spread involves creating a spread by employing ‘Put options’ rather than ‘Call options’ (as is the case in bull call spread).
- If you don’t close out your option positions and the short option is not exercised, they would just expire and your only expense is your initial outlay and trading costs.
- This trading strategy earns a net premium on the structure and is designed to take advantage of a stock experiencing low volatility.
- Let’s see how the AAPL trade would have worked out if the investor decides to take profit at 75% return on the initial debit paid, or in this case when the profits reach $369.
- Because a bull call spread involves the selling of an option, the money required for the strategy is less than buying a call option outright.