Options Trading Strategies Bull Call Spread

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Options Trading Strategies

Bull Call Spread

Bull Call Spread option trading strategy is used by a trader who is bullish in nature and expects the underlying asset to give decent returns in the near future.

The risk profile of a long call spread is very similar to that of the collar. However, with a long call spread, you would just buy a call with strike price X and sell a call with strike price Y. Generally, the stock price will be above strike price X and below strike price Y. Unlike the collar strategy, you do not own shares of the underlying stock.

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This strategy includes buying of an ‘In The Money’ Call Option and selling of ‘Deep Out Of the Money’ Call Option of the same underlying asset and the same expiration date. When you write a call, you receive premium which results in reducing the cost for buying an ITM Call Option. However, the profits are also minimized in case of a windfall rise in the underlying asset’s price.

By selling a call option, the investor receives a premium, which partially offsets the price they paid for the first call. In practice, investor debt is the net difference between the two call options, which is the cost of the strategy.

This strategy is also called as ‘Bull Call Debit Spread’ as your account gets debited while deploying the strategy.

With this strategy, you have the right to buy the stock at strike price X and you are obligated to sell the underlying stock at strike price Y if you are assigned. If you’re bullish on a stock and have an upside target, this strategy may be suited for outlook.

Now, in order to reach your maximum profit potential, you want the underlying stock’s price to be at or above strike price Y on the expiration date. However, you probably don’t want to see the stock way above the strike price because you’ll be kicking yourself thinking, “Why didn’t I just buy a call option?”

Risk: Limited, maximum potential loss is limited to the net debit paid.

Reward: Limited.

Break-even: Break-even price at expiration is strike price of call buy (ITM) plus the net debit paid.

Action

Buy 1 ‘In The Money’ Call Option

Sell 1 ‘Deep Out Of the Money’ Call Option

Bull Call Spread Example

The NIFTY is trading around 11300 levels, and Mr. G enters into Bull-Call-Spread strategy. Lot Size of NIFTY is 75.

He buys one 11200 ITM Call Option for a premium of Rs. 285, and sells one 11400 OTM Call Option for Rs. 180. The net investment will be only Rs. 7,875 [(285-180)*75], after premium received from writing the 11400 call.

Break-even: Break-even price at expiration is 11305 (11200+285-180).

Here’s a look at the payout diagram at expiration with results.