What is a Bull Call Spread?
The bull call spread is an options trading strategy designed for traders who foresee a moderate rise in the price of the underlying asset. It involves purchasing call options at a specific strike price while simultaneously selling the same number of calls on the same asset at a higher strike price, all with the same expiration date.
Key Benefits
- Aims for controlled profits with a limited rise in the asset’s price
- Employs two call options creating distinct price boundaries with lower and upper strike prices
- Caps potential losses while also restricting potential gains
Goals of a Bull Call Spread
The bull call spread strategy targets gains from a moderate rise in asset prices. Maximum profit is typically realized when the underlying asset hovers around or surpasses the higher strike price at expiration. Conversely, the strategy incurs a loss if the price drops or remains stagnant, yet the loss is limited to the net premium paid when the spread was initiated.
How to Construct a Bull Call Spread
Follow these steps to efficiently set up a bull call spread:
- Identify the Underlying Asset: Choose the asset you predict will appreciate. This could be a stock, index, or even currency.
- Buy a Call Option: Purchase a call option with a specific strike price, giving you the right (but not obligation) to buy the asset.
- Sell a Call Option: Concurrently, sell a call option with the same expiration date but higher strike price. The premium received can offset the initial investment.
- Monitor the Market: Follow the market trends and adjust your strategy accordingly.
- Close the Position: On approaching the expiration date, exercise your options or exit by offsetting your position.
Profit and Loss Calculations
Maximum Loss = Net Premium Paid
Maximum Gain = (Higher Strike Price - Lower Strike Price) - Net Premium Paid
Break-Even Price = Lower Strike Price + Net Premium Paid
An Example
Suppose a trader forecasts a modest rise in a stock currently priced at $50. They buy a call option at $50 (at-the-money) costing $3 per share and simultaneously sell a call option at $55 (out-of-the-money), yielding a $1 per share premium.
| Parameter | Value |
|---|---|
| Buy Call Option Strike Price | $50 |
| Sell Call Option Strike Price | $55 |
| Premium Paid | $3/share |
| Premium Received | $1/share |
| Net Premium | $2/share |
Net Maximum Loss: $200 (Net Premium imes 100 shares)
Net Maximum Gain: $300 ((Strike Difference - Net Premium) imes 100 shares)
Related Terms: Debit Spread, Credit Spread, Long Call, Short Call, Options Strategy.
References
- Fidelity Investments. “Bull Call Spread”
- The Options Guide. “Bull Call Spread”
- Options Education. “Bull Call Spread (Debit Call Spread)”
- Quantsapp. “Bull Call Spread Option Strategy”
- Fidelity Investments. “Options strategy: The bull call spread”
