Bull Call Spread: How the Options Trading Strategy Works

An investor should understand these and additional risks before trading. Carefully consider the investment objectives, risks, charges and expenses before investing. All investments involve risk and losses may exceed the principal invested. Past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.

• Without that it’s a lower probability of success trade that relies on a stock to trade higher.
• A bull call debit spread is entered when the buyer believes the underlying asset price will increase before the expiration date.
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• Spread strategy such as the ‘Bull Call Spread’ is best implemented when your outlook on the stock/index is ‘moderate’ and not really ‘aggressive’.
• The maximum profit of the bull call spread is limited to the difference between the strikes minus the net premium paid.

If the stock price is midway between the strike prices, the effect can be minimal. If the stock price is closer to the lower strike price of the long call, losses generally increase at a faster rate as time passes. Alternatively, if the underlying stock price is closer to the higher strike price of the written call, profits generally increase at a faster rate as time passes. 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 bull call spread strategy call options or sell ahead of the expiration date. As mentioned previously, if at expiration or time of sale, the asset price dips below your lower strike point you would not exercise the option and you would be out the premium. However, if the asset goes higher than your short call strike point, you have the option to buy the asset at the lower strike point , which is below current market value. In addition, since you are purchasing your long call option, your short call option is still active.

Bull Call Spread Vs Bear Put Spread

Only when the stock rises much above the anticipated level, a trader could book some profit. On the other hand, bullish call spread provides profit in 2 out of 3 scenarios. Also, in the third scenario, when a stock moves opposite to the view, it minimizes the losses.

This is generally the manner in which investors close out a spread before its options expire, in order to cut a loss or realize profit. The bull call spread can be considered a doubly hedged strategy. 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 long call vertical spread, and the risk of losing the entire premium paid for it, is reduced or hedged.

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The Bull Call Spread is an options strategy involving the purchase of a Call with a lower strike and the selling of a Call with a higher strike. To manage your trade, go to the “Positions” section at the bottom of the “Margin trading” section. Here, you will see various details about your positions, including their current profit and loss.

You can then sell the contracts bought at that lower strike point at the price of your higher strike point , minus the premium, thus creating your capped profit. A bull call spread consists of one long call with a lower strike price and one short call with a higher strike price. Both calls have the same underlying stock and the same expiration date. A bull call spread is established for a net debit and profits as the underlying stock rises in price.

Max Loss Scenario of Bull Call Spread

First, select which asset you want to trade using the highlighted menu from the “Pre-defined Strategies” section to the bottom of the RFQ Builder. Webull Financial LLC is a member of SIPC, which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). An explanatory brochure is available upon request or at Our clearing firm, Apex Clearing Corp., has purchased an additional insurance policy.. Backwardation implies a supply shortage because current demand is higher than the contracts that are scheduled for the future.

• When an investor is bullish on the price of a commodity, they believe that the price of the commodity will rise and continue increasing.
• In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned.
• Please ensure that you fully understand the risks involved before trading.
• The bull call spread can be considered a doubly hedged strategy.
• Because a short option is sold to reduce the trade’s cost basis, the maximum profit potential is limited to the spread width minus the debit paid.
• Let’s look at some examples to illustrate how bull and bear call spreads work in practice.

If the stock dropped to $0, Jorge would only realize a loss of $8 versus $10 . Butterfly spread is an options strategy combining bull and bear spreads, involving either four calls and/or puts, with fixed risk and capped profit. An options trader buys 1 Citigroup June 21 call at the $50 strike price and pays $2 per contract when Citigroup is trading at $49 per share. The broker will charge a fee for placing https://www.bigshotrading.info/ an options trade and this expense factors into the overall cost of the trade. So, buying one contract equates to 100 shares of the underlying asset. An expensive premium might make a call option not worth buying since the stock’s price would have to move significantly higher to offset the premium paid. Called the break-even point , this is the price equal to the strike price plus the premium fee.

Notes

This spread makes money if the backwardation widens or nearby prices increase more than deferred prices. The bull put and call spreads are referred to as vertical spreads because the positions of the strike prices on a graph are vertically separated. The effect of an increase or decrease in the volatility of the underlying stock may be noticed in the time value portion of the options’ premiums.

Calculate your profit potential – make a dry run sheet of your potential trade and use real numbers. Calculate risk – risk calculation should be your first step before placing any trade, and a bull call spread is no exception. Be sure to research the asset you plan on purchasing and make sure you have good indication there will be a moderate rise in price.