Call Bull Spread
Components
Long one call option with a low strike price and short one call option with a higher strike price.
Risk / Reward
Maximum Loss: Limited to premium paid for the long option minus the premium received for the short option.
Maximum Gain: Limited to the difference between the two strike prices minus the net premium paid for the spread.
Characteristics
When to use: When you are mildly bullish on market price and/or volatility.
You can see from the above graph that a call bull spread can only be worth as much as the difference between the two strike prices. So, when putting on a bull spread remember that the wider the strikes the more you can make. But the downside to this is that you will end up paying more for the spread. So, the deeper in the money calls you buy relative to the call options that you sell means a greater maximum loss if the market sells off.
Like I mentioned, a call bull spread is a very cost effective way to take a position when you are bullish on market direction. The cost of the bought call option will be partially offset by the premium received by the sold call option. This does, however, limit your potential gain if the market does rally but also reduces the cost of entering into this position.
This type of strategy is suited to investors who want to go long on market direction and also have an upside target in mind. The sold call acts as a profit target for the position. So, if the trader sees a short term move in an underlying but doesn't see the market going past $X, then a bull spread is ideal. With a bull spread he can easily go long without the added expenditure of an outright long stock and can even reduce the cost by selling the additional call option.
Comments (8)
Peter
August 14th, 2010 at 4:09pm
Hi James, you mean you want to place an entry stop order to buy the stock at $11 if it gets there? If you're bullish on the stock, then this is the trade to do.
However, a lot of traders who like covered calls will roll into another covered call at the next expiration - so buy the stock at $11 and then cover it will another short call option. But then it depends on how quickly the stock hits $11 after your first covered position.
James
August 14th, 2010 at 8:48am
Assume you own "xyz" now worth $10 a share... You sell a covered call @ $1 for 2-month expiration...
At the same time you place an order to buy to cover @ $11... Is this an accepted practice?
Peter
September 2nd, 2009 at 7:14am
Hi Rahul, in the payoff graphs for each strategy you will see a pink coloured line, which represents the non-linear payoff of the option component.
Is this what you mean?
Peter
September 2nd, 2009 at 7:13am
Hi Dhaka, I would say Option Volatility and Pricing by Sheldon Natenberg.
rahul pandey
September 1st, 2009 at 2:58am
options has non linear payoff. futures has linear ones. both combined generates more complex payoffs . can u give some more inf. regarding payoffs
DHAKA
August 31st, 2009 at 5:42am
HIi plz suggest me a book for [OPTION TRADING] which is best in all.
Peter
July 19th, 2009 at 8:16am
Ideally you would do the trades at the same time via a "spread trade", however, if your broker's system doesn't allow that then you can "leg" into the strategy by completing one side first.
victor
July 18th, 2009 at 1:56pm
do you long a call option and short the other at the same time or do you first long a call and then short the other call after the stock moves up.
thanks victor
Add a Comment