Bull Call Spread: How the Options Trading Strategy Works

bull call spread strategy

Supporting documentation for any claims, if applicable, will be furnished upon request. Stock options in the United States can be exercised on any business day, and the holder of a short stock option position has no control over when they will be required to fulfill the obligation. Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options. Selling or writing a call at a lower price offsets part of the cost of the purchased call. This lowers the overall cost of the position but also caps its potential profit, as shown in the example below.

bull call spread strategy

If the asset’s price surpasses the strike price, the call option’s buyer may exercise their right to obtain the asset at the strike price. Subsequently, they will sell it at the market price, thereby generating a profit. However, one significant drawback from using a bull call spread is that potential gains are limited. For example, in the example above, the maximum gain Jorge can realize is only $27 due to the short call option position. Even if the stock price were to skyrocket to $500, Jorge would only be able to realize a gain of $27. With the stock price $10 above the short call strike, the long call spread is worth around $20.

Short Box

In a bull call spread, the premium paid for the call purchased (which constitutes the long call leg) is always more than the premium received for the call sold (the short call leg). As a result, the initiation of a bull call spread strategy involves an upfront cost – or “debit” in trading parlance – which is why it is also known as a debit call spread. A bull call spread is a strategy, which combines the purchase of a call option with the sale of a call option with a higher strike price. This allows the investor to profit from a moderate increase in the price of the underlying asset, while limiting the potential losses that may occur if the prices were to drop.

  • This strategy is categorized as a debit spread, not to be confused with a credit spread.
  • 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.
  • A bull call spread consists of buying-to-open (BTO) a call option and selling-to-open (STO) a call option at a higher strike price, with the same expiration date.
  • Quantitative Perspective – The stock is consistently trading between the 1st standard deviation both ways (+1 SD & -1 SD), exhibiting a consistent mean reverting behavior.
  • For example, if a $5 wide put debit spread centered at the same $50 strike price costs $1.00, an additional $100 of risk is added to the trade, and the profit potential decreases by $100.
  • In this case, the $38 and $39 calls are both out of the money, and therefore worthless.
  • Bull call debit spreads can be entered at any strike price relative to the underlying asset.

There are two types of spreads that are deployed by traders – horizontal spread and vertical spread. The nomenclature is decided on the options that are taken to construct the strategy. This tactic involves the trader closing the current position and opening a new position using the same or similar parameters, but with a later expiration date. Thus, a trader extends the life of his position in order to protect his investment or to increase the potential profit. We will use a bull call debit spread example to illustrate the strategy.

Bull Call Spread Options Strategy

Although you will profit from the short position, as the contracts you have written will expire worthless, the options you own will also expire worthless. The potential losses are limited though, because you cannot lose any more than the cost of putting the spread on. If the stock price of Company X increases to $110 or higher by the expiration date, both options will be in the money, and you will profit from the bull call spread. If the stock price remains below $100, both options will expire worthless, and you will lose the net cost of the options. If the stock price is at or below the long call’s strike price of $145 at expiration, both the 145 and 155 call options will expire worthless, resulting in the maximum loss of $481. Bull call debit spreads have a finite amount of time to be profitable and have multiple factors working against their success.

bull call spread strategy

A bull call spread is an options strategy that consists of buying a call option while also selling a call option at a higher strike price. The benefit of a higher short call strike is a higher maximum to the strategy’s potential profit. The disadvantage is that the premium received is smaller, the higher the short call’s strike price. If you were to buy the ATM option you would have to pay Rs.79 as the option premium and if the market proves you wrong, you stand to lose Rs.79.

Adjusting a Bull Call Debit Spread

The maximum loss potential of a bull call spread is the net debit paid to enter the trade. In order to enter a bull call spread position, you need to simultaneously purchase a call option with a lower strike price and sell another call option with a higher strike price. The entry price and position size should be set according to your risks and objectives. Price forecast is a crucial step for an effective execution of the bull call spread strategy. Both fundamental and technical information should be analyzed to formulate a projection for the underlying asset’s price and evaluate the risks tied to potential price fluctuations. 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.

  • Using a bull call strategy, you buy a call option, and sell the same number of higher striking call options.
  • In this case, let’s assume the stock price is trading for $150 at the time of entering the spread.
  • Specifically, buying a call expresses your bullish sentiment and achieves the goal of limiting your risk exposure to the downside.
  • When you are expecting a moderate rise in the price of the underlying.
  • Investors opt for call options when they anticipate a substantial likelihood of the rise in the price of the underlying asset in the future.
  • In a bull call spread, the premium paid for the call purchased (which constitutes the long call leg) is always more than the premium received for the call sold (the short call leg).
  • If only the long call is in-the-money at expiration, the resulting position is +100 shares of stock per call contract.

One can attempt to quantify the ‘moderate-ness’ of the move by evaluating the stock/index volatility. The bull call spread consists of the following steps involving two call options. Some similar strategies to bull call spread bull call spread strategy include Bear Put Spread, Bull Put Spread, Bear call Spread, Long Straddle, Short Straddle, Long Strangle and Short Strangle. We have provided an example below to give you an idea of how this strategy works in practice.

However, neither IBKR nor its affiliates warrant its completeness, accuracy or adequacy. IBKR does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IBKR Campus, IBKR is not representing that any particular financial instrument or trading strategy is appropriate for you.

In practice, however, choosing a bull call spread instead of buying only the lower strike call is a subjective decision. Bull call spreads benefit from two factors, a rising stock price and time decay of the short option. A bull call spread is the strategy of choice when the https://www.bigshotrading.info/blog/how-does-non-farm-payroll-affect-the-markets/ forecast is for a gradual price rise to the strike price of the short call. The bull call spread is a strategy that consists of two call options with identical expiration dates but distinct strike prices. One of them is a long call option, and another — a short call option.