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Bull Call Spread Strategy Definition

If only the Call Option was purchased, the maximum loss would have been Rs 170. Moneyness refers to the relative position of the underlying asset’s last price to the strike price. When a call option’s Moneyness is negative, the underlying last price is less than the strike price; when positive, the underlying last price is greater than the strike price. When a put option’s Moneyness is negative, the underlying last price is greater than the strike price; when positive, the underlying last price is less than the strike price. I suppose at this stage you may be wondering why anyone would choose to implement a bull call spread versus buying a plain vanilla call option.

The written call will be out-of-the-money, and have no value. On the other hand, the long call with the lower strike price caps or hedges the financial risk of the written call with the higher strike price. As a trade-off for the hedge it offers, this written call limits the potential maximum profit for the options trading strategy. While the long call in a bull call spread has no risk of early assignment, the short call does have such risk. Early assignment of stock options is generally related to dividends, and short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned.

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.

As expiration nears, so does the deadline for achieving any profits. It is interesting to compare this strategy to the bull put spread. The profit/loss payoff profiles are exactly the same, once adjusted for the Venture capital net cost to carry. The bull call spread requires a known initial outlay for an unknown eventual return; the bull put spread produces a known initial cash inflow in exchange for a possible outlay later on.

Cashflow In Nearly Any Market

Be sure to research the asset you plan on purchasing and make sure you have good indication there will be a moderate rise in price. 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 understand what is a bull call spread how CFDs work and whether you can afford to take the high risk of losing your money. Whether the stock falls to $5 or $50 a share, the call option holder will only lose the amount they paid for the option spread ($42). Our broker guides are based on the trading intstruments they offer, like CFDs, options, futures, and stocks.

what is a bull call spread

The spread also caps the maximum profit, which is not limited with a straight call purchase. The maximum profit is the difference between the strike prices minus the cost to establish the bull call spread. The maximum possible loss is the cost to establish the spread.

Smart readers (i.e., all of you!) might well question whether there’s a trade-off for all these advantages. What, pray tell, are the cons to balance out these attractive-looking pros? That said, it may still be substantial, upwards of 100% or 150% if you structure the trade right. Second, the bull call spread accumulates profits slower than a long vanilla call. The trader is moderately bullish on the stock and wants to profit from this movement. The trader believes the underlying stock should rise towards $ 50 in the next month.

The profit is limited to the difference between two strike prices minus net premium paid. Online trading has inherent risk due to system response and access times that may vary due to market conditions, system performance, and other factors. An investor should understand these and additional risks before trading. Carefully consider the investment objectives, risks, charges and expenses before investing.

Since most stock price changes are “small,” bull call spreads, in theory, have a greater chance of making a larger percentage profit than buying only the lower strike call. In practice, however, choosing a bull call spread instead of buying only the lower strike call is a subjective decision. Bull call spreads benefit from two factors, a rising stock price and time decay of the short option.

A bull call spread is the strategy of choice when the forecast is for a gradual price rise to the strike price of the short call. The main advantage of a bull call spread appears anytime an investor can find a buy option that is lower than a sell option. This means the investor will always have the ability to locate the security for less than the price he must sell it for to his purchaser.

If only the long call is in-the-money at expiration, the resulting position is +100 shares of stock per call contract. Now, what if the INFY stock price at the expiration date ends between 1160, long call strike price and 1200, short call strike price. Then, the 1200 strike call is out of the money and has no value and 1160 strike call is in the money and is worth the difference between the INFY stock price and 1160. Introduction To Covered Calls Covered calls have always been a popular options strategy.

Also, in the third scenario, when a stock moves opposite to the view, it minimizes the losses. When applying the bull put spread, the trader collects money upfront. His goal is to hold on to as much of it as possible once the option expires.

Risk Management

Max Loss- the maximum loss that the strategy might return, which is equal to the net premium paid (Leg 1 Ask – Leg 2 Bid). Max loss occurs when the price of the underlying stock is less than or equal to the strike price of the long call. If you were to buy the ATM option you would have to pay Rs.79 as the option premium and if the market proves you wrong, you stand to lose Rs.79. However by implementing a bull call spread you reduce the overall cost to Rs.54 from Rs.79. In my view this is a fair deal considering you are not aggressively bullish on the stock/index. Often the call with the lower exercise price will be at-the-money while the call with the higher exercise price is out-of-the-money.

  • The second leg is the sale of the same number of calls with a higher strike price.
  • The maximum profit is the difference between the strike prices minus the cost to establish the bull call spread.
  • That’s why the bull call spread has a higher probability of profit.
  • An investor often employs the bull call spread in moderately bullish market environments, and wants to capitalize on a modest advance in price of the underlying stock.
  • The bull call spread requires a known initial outlay for an unknown eventual return; the bull put spread produces a known initial cash inflow in exchange for a possible outlay later on.

Buying the $60 call while simultaneously selling the $70 call would result in a net debit of $3. Let’s work through the position’s maximum loss, maximum gain, and breakeven point. In options trading, a bull spread is a bullish, vertical spread options strategy that is designed to profit from a moderate rise in the price of the underlying security. The bull call spread is a suitable option strategy for taking a position with limited risk and moderate upside.

Bull Call Debit Spreads Screener

Because of put–call parity, a bull spread can be constructed using either put options or call options. The following strategies are similar to the bull call spread in that they are also bullish strategies that have limited profit potential and limited risk. The passage of time hurts the position, though not as much as it does a plain long call position.

what is a bull call spread

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. Long leg is part of a spread or combination strategy that involves taking two positions simultaneously to generate a profit. ABC at $88, the call strategy lost money, while the bull call spread made a more than 57% return.

Market View

The sold call options commit the trader to buying shares if the option buyer elects to exercise. The sold options would only be exercised if the stock rose above the higher strike price. If the options were exercised, the trader must deliver the shares.

Bull Put Spread Vs Bull Call Spread

You can benefit from this strategy by buying a Call with a Strike price of 10,300 at a premium of 170 and selling a Call option with a strike price 10,700 at a premium of Rs 60. The net premium paid here is Rs 110 which is also your maximum loss. The options trader employing this strategy hopes that the price of the underlying security goes up far enough that the written put options expire worthless. This strategy consists of buying one call option and selling another at a higher strike price to help pay the cost.

The biggest disadvantage of a bull call spread is the effects of time decay, known in the options world as “theta.”, one of the greeks. As its name suggests, a bull call spread may Currency Pair be used when the investor is bullish on a market and wants to potentially profit from higher prices. For ease of understanding bull call spreads, let’s take American Airlines .

What Are Bull Call Option Spreads And How To Trade Them?

The bullish call spread strategy helps to cap loss if the price of an asset drops, however, the strategy also caps the amount of potential gains in case of a price increase. Bullish investors often use this when trading futures, bonds, and equities. This strategy is categorized as a debit spread, not to be confused with a credit spread.

Author: Lorie Konish

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