To minimize the risk of over-allocation, the position can be closed before the options expire. Thus, the net value of the position will be equal to $300 (which means the maximum potential loss is also $300). At the same time, the maximum potential profit will be $2,700 (the difference between the strike prices minus the net value of the position). If you have an inkling that the price of a contract is going to rise moderately, and the market is exceptionally volatile, a bull call spread would be the trade to use. As we mentioned, you want to use this during times of volatility because it caps your max losses.

Point C represents the breakeven point when the underlying security price is adequate to cover the spread credit. It goes up to line DE, the maximum profit when the underlying security price moves in line with the trader’s expectation and exceeds the strike price. To implement a bull call spread involves choosing the asset that is likely to experience a slight appreciation over a set period of time (days, weeks, or months).

Spread Trading Education

If at expiry, the stock price has risen and is trading above the upper strike price—the second, sold call option—the investor exercises their first option with the lower strike price. Now, they may purchase the shares for less than the current market value. The position is profitable when the price of the underlying asset moves above the strike price of the long call option. And vice versa, when the price of the asset moves below the long option strike price, the position will result in a loss.

The profit is the difference between the lower strike price and upper strike price minus, of course, the net cost or premium paid at the onset. The opposite of a bull call debit spread is the bull put credit spread. With a bullish credit spread, the investor sells one put option and buys another with a lower strike price. This strategy is used in bear markets when the investor expects the price of the underlying asset to decline. The spread will lose money if the underlying security doesn’t increase in price.

Example of a Bull Call Spread

Therefore let us take up a few scenarios to get a sense of what would happen to the bull call spread for different levels of expiry. 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’. Given this you expect the stock price to react positively to the result announcement. However because the guidance was laid out in Q2 the market could have kind of factored in the news. This leads you to think that the stock can go up, but with a limited upside. Spread strategy such as the ‘Bull Call Spread’ is best implemented when your outlook on the stock/index is ‘moderate’ and not really ‘aggressive’.

In bull spreads, a Bull Put Spread is created by selling a put option and buying another put option of the same underlying asset and expiration date but a lower strike price. In the case of horizontal spreads, two options, either call or put, bull call spread strategy are selected from different strikes. In a vertical spread, the two options selected are from the same underlying asset and the same expiry date but different strike prices. In order to manage a bullish call spread, we first have to build one.

Study Notes:

Any specific securities, or types of securities, used as examples are for demonstration purposes only. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Brokerage Products and Services offered by Firstrade Securities Inc. When you are expecting the price of the underlying to moderately drop. When you are expecting a moderate rise in the price of the underlying. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of projectfinance by tastyworks and/or any of its affiliated companies.

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. This example demonstrates that a significant stock price increase results in healthy profits for a bull call spread trader. With the stock $45 points below the long 575 call at expiration, the long call spread expires worthless. The resulting loss for the call spread buyer  is $2,145 ($21.45 debit paid x 100).

Short Straddle

A mutual fund or ETF prospectus contains this and other information and can be obtained by emailing Moderately Bullish
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. If the investor’s opinion is very bullish on a stock it will generally prove more profitable to make a simple call purchase. In the first 30 days of the trade, the stock price stagnates around the breakeven price of the long call spread. However, with around 45 days to expiration, the stock jumps 30% to $80 after an earnings announcement.

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. Essentially, a bull call spread’s delta, which compares the change in the underlying asset’s price to the change in the option’s premium, is net positive. Should the stock increase to $61, the value of the $50 call would rise to $10, and the value of the $60 call would remain at $1.

Option investors can rapidly lose the value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options before trading options. All investments involve risk, and not all risks are suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment.

The price paid for the call with the lower strike price is partially offset by the premium received from writing the call with a higher strike price. Thus, the investor’s investment in the https://www.bigshotrading.info/blog/the-basics-of-currency-trading-and-how-does-this-work/ long call vertical spread, and the risk of losing the entire premium paid for it, is reduced or hedged. Bull call debit spreads can be hedged if the underlying stock’s price has decreased.

What is a bull call spread?

If only the long call is in-the-money at expiration, the resulting position is +100 shares of stock per call contract. Early assignment, while possible at any time, generally occurs only when the stock goes ex-dividend. Be warned, however, that using the long call to cover the short call assignment will require establishing a short stock position for one business day, due to the delay in assignment notification. The passage of time hurts the position, though not as much as it does a plain long call position. 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. 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.

• This strategy is also called a call debit spread because it causes the trader to incur a debit (spend money) up front to enter the position.
• Stock XYZ is trading at $100 and you establish a bull call spread for a $1.80 debit.
• Stock options in the United States can be exercised on any business day, and the holder of a short stock option position has no control over when they will be required to fulfill the obligation.
• Early assignment, while possible at any time, generally occurs only when the stock goes ex-dividend.
• A loss of this amount is realized if the position is held to expiration and both calls expire worthless.
• It’s important to note that purchasing out-of-the-money call spreads is a low probability trade because the breakeven price is above the stock price at entry.
• In the strategy, the trader buys one call option with a lower strike price and sells another call option with a higher strike price.