One of the most common strategies that proprietary desks globally use when it comes to options trading is spreads. Easy to construct and trade, these two-legged strategies account for the lion’s share of strategy for professional traders. The motivation for option traders is the ability to profit from the increase in price of the underlying asset and limit the potential losses.
Please be aware that this example is purely for the purposes of illustrating the strategy and doesn’t contain precise prices and it doesn’t take commission costs into account. Do your research and look at historical charts – before placing a bull call spread make sure you know everything about them. Read up on historic examples or better yet, contact one of our experienced RJO Futures Brokers. In this case, you will neither use ITM nor OTM because the total yield will provide you with zero profit. In this case, your total loss would be Rs 5,000, which is the net premium. Advisory accounts and services are provided by Webull Advisors LLC (also known as “Webull Advisors”).
How to Set up a Debit Spread Option
There are other benefits that spreads can offer but like all options strategies there are also some trade-offs. In this article, I’d like to compare a long call with a vertical bull call spread in order to help illustrate some of those benefits and risks. A Bull Call Spread (or Bull Call Debit Spread) strategy is meant for investors who are moderately bullish of the market and are expecting mild rise in the price of underlying. The strategy involves taking two positions of buying a Call Option and selling of a Call Option. 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.
- Once you have your bull call spread built, you can now wait out the expiry date you chose when you purchased your long and short call options or sell ahead of the expiration date.
- A bull call spread, which is an options strategy, is utilized by an investor when he believes a stock will exhibit a moderate increase in price.
- Bull call debit spreads can be rolled out to a later expiration date if the underlying stock price has not moved enough.
- This makes you bullish on the stock, but the fact that it there is a chance that it could spend more time near the 2nd SD before reverting to mean caps your bullish outlook on the stock.
- The broker will charge a fee for placing an options trade and this expense factors into the overall cost of the trade.
The 7900 CE option also has 0 intrinsic value, but since we have sold/written this option we get to retain the premium of Rs.25. The following diagram represents a payoff diagram of a Bull Put Spread. Securities trading is offered to self-directed customers by Webull Financial LLC, a broker dealer registered with the Securities and Exchange Commission (SEC). We buy 1 XYZ 100 call for a total of $330 (1 x 100 multiplier x $3.30) and sell 1 XYZ 105 call for a total of $150 (1 x 100 multiplier x $1.50). See our Terms of Service and Customer Contract and Market Data Disclaimers for additional disclaimers.
The trade will result in a loss if the price of the underlying decreases at expiration. Often the call with the lower exercise price will be at-the-money
while the call with the higher exercise price is out-of-the-money. Both calls must have the same underlying security and expiration month. 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.
What is the best bull call spread strategy?
A bull call spread performs best when the price of the underlying stock rises above the strike price of the short call at expiration. Therefore, the ideal forecast is “modestly bullish.”
Finally, if the spread was held through expiration, no stock position would be taken on because the exercise/assignment of the long and short call options cancel each other out. However, it’s possible that the spread trader is assigned on the short call when it’s deep-in-the-money before expiration. Since the long call is in-the-money at expiration, the trader would end up with +100 shares of stock (per contract) if they did not sell the long call before expiration. Upon selling the long call portion of a bull call spread, it’s wise to buy back the short call.
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While the long call in a bull call spread has no risk of early assignment, the short call does have such risk. Early assignment of stock options is generally related to dividends, and short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned. Therefore, if the stock price is above the strike price of the short call in a bull call spread (the higher strike price), an assessment must be made if early assignment is likely. If assignment is deemed likely and if a short stock position is not wanted, then appropriate action must be taken. Before assignment occurs, the risk of assignment can be eliminated in two ways.
- However you are not completely bullish as whatever said and done the stock is still in a downtrend.
- It’s a very good strategy to use when your outlook is bullish and you believe you can be relatively accurate in predicting how high the price of the underlying security will rise.
- This strategy breaks even at expiration if the stock price is above the lower strike by the amount of the initial outlay (the debit).
- The higher the strike price, the more potential profits you can make but the less money you receive to offset the costs of buying at the money calls.
Bull call spreads are a popular options trading strategy used by investors who are moderately bullish on a particular underlying asset. This strategy involves buying a call option with a lower strike price and simultaneously selling a call option with a higher strike price, both with the same expiration date. The goal is to profit from https://www.bigshotrading.info/blog/what-is-spread-betting-and-how-does-it-work/ an upward price movement in the underlying asset while minimizing the potential for losses. The losses and gains from the bull call spread are limited due to the lower and upper strike prices. If at expiry, the stock price declines below the lower strike price—the first, purchased call option—the investor does not exercise the option.
While horizontal spreads are constructed mainly to capitalise on a non-directional trade, vertical spreads are created to benefit from a directional move. If the Bitcoin price stays between $22,000 and $25,000, the profit will depend on the difference between the market bull call spread strategy price and the exercise price of the first call option. While the call option grants the holder the right to acquire the asset, at the same time it obliges the option writer to sell the asset. For this risk, the seller who opens a short position charges a premium.
In-the-money options will be more expensive than out-of-the-money options. The further out-of-the-money the spread is purchased, the more bullish the bias. A bull call spread is an option strategy that involves the purchase of a call option and the simultaneous sale of another option with the same expiration date but a higher strike price. It is one of the four basic types of price spreads or “vertical” spreads, which involve the concurrent purchase and sale of two puts or calls with the same expiration but different strike prices.