How Does A Bull Call Spread Work? Our Expert Explains admin January 26, 2021

How Does A Bull Call Spread Work? Our Expert Explains

bull call spread strategy

Factoring in net commissions, the investor would be left with a net loss of $7. Factoring in net commissions, the investor would be left with a net gain of $3. Based on volatility I have devised a few rules (works alright bull call spread strategy for me) you may want to improvise on it further – If the stock is highly volatile, then I would consider a move of 5-8% as ‘moderate’. However if the stock is not very volatile I would consider sub 5% as ‘moderate’.

Is bull call spread risky?

Perceived risk is limited: Since this is a debit spread, the most the investor can lose with a bull call spread is the net premium paid for the position. The tradeoff for this limited risk profile is that the potential return is capped.

Max gain equals the net premium earned, and max loss is limited to the distinction between the exercise prices minus the net premium earned. Short call and short put vertical option combinations are types of credit spreads. While the long call in a bull call spread has no risk of early assignment, the short call does have such risk.

What Is A Vertical Put Spread

Note, however, that whichever method is chosen, the date of the stock purchase will be one day later than the date of the stock sale. This difference will result in additional fees, including interest charges and commissions. Assignment of a short call might also trigger a margin call if there is not sufficient account equity to support the short stock position. The bullish investor would pay an upfront fee—the premium—for the call option.

Selling the spread back to the market and purchasing the same spread at a further expiration is one such method. Such information may be collected in a manner that the client is always aware of the collection and purported usage of the same. The client shall have an option to withdraw consent to share the information. Such intimation shall only be taken into account from the date on which the same is received. Sharekhan Comtrade Private Limited may choose to stop services to such a client in case such intimation is received.

Bull Call Spread Strategy

Upon deploying a vertical spread, you navigate this matrix from ‘top-to-bottom’. That is, you are picking two matching options (either calls or two puts) that align vertically, distinguished solely by their strike prices. We begin by discussing the two call option strike prices involved in a Bull Call Spread, the risk-defined aspects of the technique, and how profits and losses are calculated. This means you have the chance to make a bigger return on your investment than you would by simply buying calls, and also have reduced losses if the underlying security falls in value.

Chris Butler received his Bachelor’s degree in Finance from DePaul University and has nine years of experience in the financial markets. You may switch the view using the links at the top of the screener results table. The Main View shows the Volume and Open Interest for each option, while the Dividend & Earnings View can be used to highlight strategies with upcoming dividends and earnings. The Filter view shows you the data contained in the field(s) you’ve added to the screener.

Dividend Capture using Covered Calls

The potential losses are limited though, because you cannot lose any more than the cost of putting the spread on. 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. 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.

Which is better bull call spread or bull put spread?

And you have a moderately bullish outlook looking ahead, then it makes sense to invoke a Bull Put Spread for a net credit as opposed to invoking a Bull Call Spread for a net debit. Personally I do prefer strategies which offer net credit rather than strategies which offer net debit.

Call options can be used by investors to benefit from upward moves in an asset’s price. If exercised before the expiration date, these options allow the investor to buy the asset at a stated price—the strike price. The option does not require the holder to purchase the asset if they choose not to. For example, traders who believe a particular stock is favorable for an upward price movement will use call options.

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