What Is A Bull Call Spread?

bull call spread strategy

However, the additional debit spread will cost money and extend the break-even point. A bull call debit spread is entered when the buyer believes the underlying asset price will increase before the expiration date. Bull call spreads are also known as call debit spreads because they require paying a debit at trade entry. The further out-of-the-money the bull call debit spread is initiated, the more aggressive the outlook. There are actually two types of vertical call spreads, the profitability of which will depend on the market trend.

What is opposite of bull call spread?

A Bull Call Spread strategy works well when you're Bullish of the market but expect the underlying to gain mildly in near future. The bear call spread options strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.

So you can focus on the best options, the screener starts by applying these default filters. Filter settings should be adjusted to match your trading requirements. The best bull call strategy is one where you think the price of the underlying stock will go up. This is not an offer or solicitation in any jurisdiction where Firstrade is not authorized to conduct securities transaction. A long call Option strategy works well when you expect the underlying instrument to move positively in the recent future.

Pros of the Strategy

None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. When you are expecting a moderate rise in the price of the underlying. Please note that any advertisement has not been reviewed by the Monetary Authority of Singapore.

bull call spread strategy

Finally, we will put these two strategies side by side and review their respective benefits and trade-offs. Options trading privileges are subject to Firstrade review and approval. Please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.

Further Reading On Options Trading…

Buy a call option on Bitcoin with an exercise price of $20,000, which costs $500 (premium). Concurrently, sell a call on Bitcoin with an exercise price of $21,000, which you sell for $300. The loss occurs if the value of the base asset is below the lower exercise bull call spread strategy price (for a call spread) or above the higher exercise price (for a put spread) at expiry. When a Bull Call Spread is purchased, the trader instantly knows the maximum amount of money they can possibly lose and the maximum amount of money they can make.

  • The net premium paid for the options equals ₹120, which is the maximum loss.
  • Compare Bull Call Spread and Bull Put Spread options trading strategies.
  • It is a two-leg spread strategy with ATM and OTM options transactions.
  • This is a simple strategy, which appeals to many traders, and you know exactly how much you stand to lose at the point of putting the spread on.
  • Find similarities and differences between Bull Call Spread and Bull Put Spread strategies.
  • If the stock price is below the long call option at expiration, both options will expire worthless, and the full loss of the original debit paid will be realized.

Bull call debit spreads can be entered at any strike price relative to the underlying asset. 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 https://www.bigshotrading.info/stock-market-basics/ more bullish the bias. The bull call spread reduces the cost of the call option, but it comes with a trade-off. The gains in the stock’s price are also capped, creating a limited range where the investor can make a profit.

Risk Management

If at expiry, the stock price declines below the lower strike price—the first, purchased call option—the investor does not exercise the option. The option strategy expires worthlessly, and the investor loses the net premium paid at the onset. If they exercise the option, they would have to pay more—the selected strike price—for an asset that is currently trading for less. Conversely, in debit spreads, you pay money upfront by buying an option and selling another one to reduce the cost. Max gain equals the distinction between the exercise prices minus the net premium expenditure, and max loss is limited to the net premium expenditure.

Leave a Reply

Your email address will not be published. Required fields are marked *