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The Bull Call Spread Options Trading Strategy
To construct a bull call spread, we’ll have to buy a call option and sell the same number of calls at a higher strike price. In this example, we’ll buy one of the 145 calls and sell one of the 155 calls.
How Can a Bull Call Spread Benefit You?
With a bull call spread, the losses are limited, reducing the risk involved, since the investor can only lose the net cost to create the spread. The net cost is also lower as the premium collected from selling the call helps to defray the cost of the premium paid to buy the call. Traders will use the bull call spread if they believe an asset will rise in value just enough to justify exercising the long call but not enough to where the short call can be exercised.
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Bull Call Spread: An Alternative to the Covered Call
However, if the stock price is “close to” or above the strike price of the short call , then the price of the bull call spread increases with passing time . This happens because the short call is now closer to the money and decreases in value faster than the long call. A bull call spread consists of one long call with a lower strike price and one short call with a higher strike price. Both calls have the same underlying stock and the same expiration date. A bull call spread is established for a net debit and profits as the underlying stock rises in price. Profit is limited if the stock price rises above the strike price of the short call, and potential loss is limited if the stock price falls below the strike price of the long call . The level of risk in a bull call spread is limited to the initial premium paid for purchasing the position.
- The bull call spread consists of the following steps involving two 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.
- If the stock price is above the higher strike price, then the long call is exercised and the short call is assigned.
- This technique is useful to bullish investors who believe the price will go up.
- However, with around 45 days to expiration, the stock jumps 30% to $80 after an earnings announcement.
- The maximum risk of the bullish call spread is limited to the total premium paid in buying a low strike price call.
If the bull call spread is done so that both the sold and bought calls expire on the same day, it is a vertical debit call spread. The recommendation, this is not a strategy that should be executed very often unless there is evidence of an expected upward movement. Without that it’s a lower probability of success trade that relies on a stock to trade higher. It requires less capital to participate than simply purchasing stock, which means lower risk, but is still considered to be a lower probability of success trade. To learn more about bull call spread option strategy click here. The trade will result in a loss if the price of the underlying decreases at expiration.
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A loss of this amount is realized if the position is held to expiration and both calls expire worthless. Both calls will expire worthless if the stock price at expiration is below the strike price of the long call . Max Pain is a situation where the stock price locks on a strike price https://www.bigshotrading.info/ as it moves forward towards its expiration. This can lead to monetary losses for the highest possible of traders. Max Pain aims to define how, in the last days, the underlying stock prices sometimes cluster around the strike price, which can provide all the option buyers with losses.
There is no free lunch when it comes to options trading, and the bull call spread is no exception. The spread does come with some disadvantages as well that should be carefully considered.
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. 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. This strategy is also called a call debit spread because it causes the trader to incur a debit up front to enter the position. Time decay is working against the investor if the call spread is out of the money because they need more time for this trade to become profitable.
- 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’.
- A bull call spread is best used during times of high volatility.
- Carefully consider the investment objectives, risks, charges and expenses before investing.
- ProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs.
- Many times, a covered call is exercised early so the buyer canown the stock and collect the dividend.
- Calculate risk – risk calculation should be your first step before placing any trade, and a bull call spread is no exception.
The short call’s main purpose is to help pay for the long call’s upfront cost. If the stock price is in-between the strike prices at expiration, such as $149.81, the long 145 call will have value while the 155 call will expire worthless. At $149.81, the 145 call will be worth $4.81 ($149.81 Stock Price – $145 Strike Price) and the 155 call will be worth $0, resulting in no profit or loss on the trade. In this case, let’s assume the stock price is trading for $150 at the time of entering the spread.