What is Bull Call Spread Strategy Basics, Advantages and Disadvantages


bull call spread strategy

The profit/loss payoff profiles are exactly the same, once adjusted for the 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. Up to a certain stock price, the bull call spread works a lot like its long call component would as a standalone strategy.

bull call spread strategy

The maximum gain is capped at expiration, should the stock price do even better than hoped and exceed the higher strike price. If the stock price is at or above the higher strike at expiration, in theory, the investor would exercise the long call component and presumably would be assigned on the short call.

What Is a Bull Call Spread?

Profit is limited to the difference in strike values minus the debit . The bull call strategy succeeds if the underlying security price is above the higher or sold strike at expiration. A bull call spread option strategy involves buying a call option and simultaneously selling a call option on the same stock with the same expiration date but with different strike prices.

The stock price has broken out from the downward sloping trendline on the weekly chart. The volatility of volatility, or VVIX, can be helpful to add to your watchlist.

Can I Hold My Bull Call Spread Till Expiration?

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. For example, an investor could buy a $50 call option and sell a $55 call option. If the spread costs $2.00, the maximum loss possible is -$200 if the stock closes below $50 at expiration. The maximum profit is $300 if the stock closes above $55 at expiration. As mentioned above, the bull call limits its maximum loss to the net premium paid for the options.

  • Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset.
  • Bullish price action is always our primary view with a bull call spread.
  • Commissions, taxes and transaction costs are not included in this discussion but can affect final outcome and should be considered.
  • Start with this CORE long call spread sample bot template if you’re new to options trading or the autotrading platform.
  • Further increases in underlying price have no effect, because above the higher strike both options increase in value at the same rate.

Even if the stock price were to decline to $0, Jorge would only be able to realize a https://www.bigshotrading.info/ gain of $20. The strike price for this option is $140 and expires in January 2020.

Bull Call Debit Spread market outlook

If an investor’s view does not change, there are no issues continually holding a bull call spread to expiration. If the underlying stock remains below $35 before expiration, both legs of the spread will drop in value due to time decay, which is not what you’d hoped to see. For example, the long call may fall from bull call spread strategy $3.40 to $1.55, while the short call may drop from $1.40 to $1.05. They work best in markets where the underlying asset is rising moderately and not making large price jumps. While it can be profitable if the trader’s bullish view works out, the maximum amount that can be lost is also known at the outset.

Using Spreads to Your Advantage in a Sideways Market – Upstox

Using Spreads to Your Advantage in a Sideways Market.

Posted: Fri, 06 Jan 2023 08:00:00 GMT [source]

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