Bull Call Spread

bull call spread strategy

In the iron condor strategy, the investor simultaneously holds a bull put spread and a bear call spread. 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) bull call spread strategy approval for a pharmaceutical stock. Strangles will almost always be less expensive than straddles because the options purchased are out-of-the-money options. The bull call spread is a two leg spread strategy traditionally involving ATM and OTM options.

Using this strategy, the investor is able to limit their upside on the trade while also reducing the net premium spent (compared to buying a naked call option outright). This is a very popular strategy because it generates income and reduces some risk of being long on the stock alone. The trade-off is that you must be willing to sell your shares at a set price—the short strike price. 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. 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.

Bull Call Spread: How this Options Trading Strategy Works

It’s important to note that this is a simplified overview of the process. Investors should conduct their own research before implementing https://www.bigshotrading.info/ a bull call spread or any other investment strategy. Time is another important variable that influences the price of an option.

  • The short call’s main purpose is to help pay for the long call’s upfront cost.
  • Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, 125 S.
  • However, it is important to note that bull call spreads involve risks, including the possibility of losing the entire premium paid for the options.
  • Specifically, you expect the stock of ABC Corporation, which is now trading at $50, to move up to about $55 in the next few months.
  • To determine maximum profit potential, simply take the difference between strike prices and subtract the premium paid for the spread, also factoring any any commissions or fees.
  • Conversely, selling the higher strike call could mean parting with the asset at that price if the buyer exercises their option.
  • Your maximum profit is the difference between the strike prices minus the net premium and any transaction fees.

Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. In this case, the $38 and $39 calls are both 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. Let us take an example, If you are willing to buy Reliance call option priced at Rs 1951.

What is Volume in the stock market? How to use volume while trading?

Since the strategy involves being long one call and short another with the same expiration, the effects of time decay on the two contracts may offset each other to a large degree. Traders holding American-style options can exercise them on any trading day up to the day of expiry. Those who hold short stock options have no control over when they may have to fulfill the obligation of the contract. 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. Finally, when the price moves below the lower strike price, both options are out-of-the-money and the payoff is constant, equivalent to the initial cost of the position.

bull call spread strategy

As mentioned above, the bull call limits its maximum loss to the net premium (debit) paid for the options. The bull call also caps profits up to the strike price of the short option. A bull call spread’s profit increases as the underlying security’s price increases up to the strike price of the short call option. Thereafter, the profit remains stagnant if the underlying security’s price increases beyond the short call’s strike price. Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant.

Are Protective Puts a Waste of Money?

We can see that a rise in implied volatility hurts the trade above the short call, but helps to minimize losses below the long call. If there is a change in volatility, the expiration graph will not change but the interim dates will. Here’s how the trade looks assuming a 30% rise in implied volatility. Bull call spreads are generally long vega trades, but that can change depending on where the underlying stock is trading in relation to the spread.

  • Bull spread option strategies are a way to express a bullish view with a limited initial cash investment.
  • 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.
  • In this case, it would be $5, which is the difference between $55 and $50, less $2, which is the net premium paid.
  • All options have the same expiration date and are on the same underlying asset.
  • The further these strikes are the larger the spread, the larger the spread the larger is the possible reward.