Friday, 25 May 2012

WHAT IS BULL CALL SPREAD


OPTION TRADING STRATEGY
Bull Call Spread

The bull call spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go up moderately in the near term.
Bull call spreads can be implemented by buying an at-the-money call option while simultaneously writing a higher striking out-of-the-money call option of the sameunderlying security and the same expiration month.
Bull Call Spread Construction
Buy 1 ITM Call
Sell 1 OTM Call





By shorting the out-of-the-money call, the options trader reduces the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price skyrockets. The bull call spread option strategy is also known as the bull call debit spread as a debit is taken upon entering the trade

Limited Upside profits

Maximum gain is reached for the bull call spread options strategy when the stock price move above the higher strike price of the two calls and it is equal to the difference between the strike price of the two call options minus the initial debit taken to enter the position.

The formula for calculating maximum profit is given below:
  • Max Profit = Strike Price of Short Call - Strike Price of Long Call - Net Premium Paid - Commissions Paid
  • Max Profit Achieved When Price of Underlying >= Strike Price of Short Call

Limited Downside risk

The bull call spread strategy will result in a loss if the stock price declines at expiration. Maximum loss cannot be more than the initial debit taken to enter the spread position.

The formula for calculating maximum loss is given below:
  • Max Loss = Net Premium Paid + Commissions Paid
  • Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

Breakeven Point(s)

The underlier price at which break-even is achieved for the bull call spread position can be calculated using the following formula.
  • Breakeven Point = Strike Price of Long Call + Net Premium Paid

3 comments:

  1. The ups and downs are the two side of every business and we should select that strategy that is less vulnerable to losses

    ReplyDelete
  2. these kind of articles will be better if with examples

    ReplyDelete
  3. This was helpful and gave me ideas about what is good for trading

    ReplyDelete