Bull Call Spread is one of the vertical spread option trading strategies. It usually involves buying at the money call options and selling out of the money call options with the same expiration date. It is also known as Long Call Spread or Call Debit Spread
Outlook: With this stock option trading strategy, your outlook is moderately bullish.
You are expecting a mildly rise in the underlying stock price.
Risk and Reward
Maximum Reward :
Advantages and Disadvantages
Exiting the Trade
Bull Call Spread Example
Assumption: XYZ is trading at $72.65 a share on Mar 20X1. You are expecting share price of XYZ to rise mildly. The option premium for the At The Money call is relatively high for you. In this case, you may consider to buy one Jun 20X1 $70 strike call at $6.30 and sell one Jun 20X1 $75 strike call at $3.50 to lower the amount of premium payable and profit from the moderately bullish outlook of the stock. Note: commissions are NOT taken into account in the calculation.
Analysis of Bull Call Spread Example
Maximum Risk = Net Premium Paid = ($6.30 - $3.50) * 100 = $280
Maximum Reward = Difference in Strike Price Less Net Premium Paid = ($75 - $70) * 100 - $280 = $220.
Breakeven = Lower Strike Price of the call options Plus Net Premium Paid = $70 + $2.80 = $72.80
This is one of the most common and basic forms of stock option strategies. When you entered into this spread, you are moderately bullish on the underlying stock and are looking for a way to profit from a bullish move at a reasonable cost. This is because if a trader is very bullish, he would have bought a call option outright and gain a potentially unlimited profit.
The net effect of using this option spread strategy is to lower the cost and breakeven of the trade compare to buying a call option outright. The bought leg of the spread gives you the leverage. The short leg of the spread reduces your cost and increase the leverage, though at the expense of capping the maximum profit.
Try to ensure that the underlying stock is in an upward trend and trade within a limited range of stock prices when you are using this strategy.
Identify a clear area of support.
It is preferably to trade this option trading strategy with at least 3 months to expiration so as to give yourself more time to be right. Use the same expiration date for both legs of the calls.
There are literally thousands of Bull Call Spread options combinations available. Each has its own unique risk, reward, time frames, volatilities characteristics and probabilities of success. You should pick the strike price and time frame of the spread according to your risk profile and forecast. Selecting the option trading strategies with appropriate risk-reward parameters is important to your long term success in trading spread.
Bull Put Spread
Bear Put Spread
Long Call Condor