Furthermore, assume again that it is a standard option, meaning every option contract controls 100 shares. A Real World Example of a Bull Call Spread, American Options Allow Investors to Exercise Early to Capture Dividends, How Bullish Investors Can Make Money With the Call Ratio Backspread. Bull Call Spread Example Let’s consider a bull call spread position created by the following transactions: Buy a $45 strike call option for $4.38 per share (after commissions), resulting in initial cash outflow of $438 (assuming one option contract represents 100 shares of the underlying). Thus even though the trader’s view was correct, still the trader had to book a loss. Bull Spread - Bull Put Spread - Example. At the same time, the trader sells 1 Citi June 21 call at the $60 strike price and receives $1 per contract. Bull Spread . In practice, investor debt is the net difference between the two call options, which is the cost of the strategy. Bull Spread is a strategy that option traders use when they try to make profit from an expected rise in the price of the underlying asset. Bull Put Spread is a vertical spread, that involves buying and selling two put option contracts simultaneously, both with the same underlying security and expiry, but different strike prices. The losses and gains from the bull call spread are limited due to the lower and upper strike prices. Bull Call Spread Max Profit = Difference between call option strike price sold and call option strike price purchased – Premium Paid for a bull call spread. Sell a $50 strike put for $4.49 per share, or $449 total cash inflow. The trader is moderately bullish on the stock and wants to profit from this movement. By choosing to continue, you will be taken to , a site operated by a third party. As a result, the gains earned from buying with the first call option are capped at the strike price of the sold option. Now, they may purchase the shares for less than the current market value. By selling a call option, the investor receives a premium, which partially offsets the price they paid for the first call. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Christmas Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More, You can download this Bull Call Spread Excel Template here –, 1 Course | 3+ Hours | Full Lifetime Access | Certificate of Completion. A Bull Call Spread strategy works well when you're Bullish of the market but expect the underlying to gain mildly in near future. If the stock falls below $50, both options expire worthlessly, and the trader loses the premium paid of $100 or the net cost of $1 per contract. The net investment required to put on the spread is a debit of $200. Following are the Strike Prices and LTP (last trading price) of the ATM and OTM Call options Strike Price = $100 | LTP = $5 (ATM) You're confident that the stock will be trading higher in the near term, although you're not necessarily expecting a huge jump in the share price. Normally bullish call spread is executed with at the money long and out of the money short calls, but depending on the trading spread and time to expiry, this can be customized to maximize profits and minimize losses. Traders who believe a particular stock is favorable for an upward price movement will use call options. A long call spread, or bull call spread, is an alternative to buying a long call where you also sell a call at a strike price below the purchased call strike price. Max loss is debit paid = $.58 or $58. Trader is expecting that the price of the stock will raise. The total cost for this contract is $285- $125 = $160 plus commissions. Because the trader paid $2 and received $1, the trader’s net cost to create the spread is $1.00 per contract or $100. Should the underlying asset fall to less than the strike price, the holder will not buy the stock but will lose the value of the premium at expiration. If the option's strike price is near the stock's current market price, the premium will likely be expensive. Bull Call Spread Example. Through using a bull call spread, he only needs to pay a net of $8. The option does not require the holder to purchase the shares if they choose not to. If the share price moves above the strike price the holder may decide to purchase shares at that price but are under no obligation to do so. A Real World Example of a Bull Call Spread An options trader buys 1 Citigroup ( C ) June 21 call at the $50 strike price and pays $2 per contract when Citigroup is trading at $49 per share. Markets Home Active trader. The bullish call spread can limit the losses of owning stock, but it also caps the gains. In order to enter bull put spreads, you buy a JUL 40 put ($100) and write “sell” a JUL 45 put for $300. Click here to see detailed explanations and examples on how and when to use the Bull Call Spread options trading strategy! Let's suppose you're bullish on that old favorite of ours, the XYZ Zipper Company which is currently trading around $40/share. A bull call spread is established for a net debit (or net … A bull call spread is a great substitute in comparison to buying a naked call option. A bull put spread is an options strategy used when a trader is seeking to profit from a moderate increase in the price of the underlying stock. Also, options contracts are priced by lots of 100 shares. Buy a call option for a strike price above the current market with a specific expiration date and pay the premium. To execute the strategy, a trader would sell and out-of-the-money put option whilst simultaneously buying a further out-of-the-money put option with the following conditions: Example of bull put spread A bull put spread consists of one short put with a higher strike price and one long put with a lower strike price. A bull put spread uses two put options to form a spread. Also, in the third scenario, when a stock moves opposite to the view, it minimizes the losses. The maximum risk of the bullish call spread is limited to the total premium paid in buying a low strike price call. Bull Call Spread Max Reward/Loss. It aims at profits with not much movement in the, It takes advantage of the time decay feature by shorting/selling a higher strike call. Let’s calculate the trade parameters to execute this trade. If the strike price rises much above the higher strike price, then the maximum profit is capped and start acting as a liability on the trading position. Let’s take a quick example to understand this. ($2 long call premium minus $1 short call profit = $1 multiplied by 100 contract size = $100 net cost plus, your broker's commission fee). The bull call spread can be exited completely simply by offsetting the spread. Example Suppose you are bullish on Nifty, currently trading 10,500, and expecting a mild rise in its price. Let’s see how these positions play out at expiry. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. Therefore, he decides to buy a bull call spread.Bill buys 40 long calls at $1.25, paying $125 and sells 40 short calls at $2.85, receiving $285. One of the most interesting and challenging parts of options spreads, is the ability to put together positions that utilize completely different options to achieve the same or similar objective. Consider a positional trader who wants to trade on stock options currently trading at $ 30. A bull put spread is an income-generating options strategy that is used when the investor expects a moderate rise in the price of the underlying asset. Should the stock increase to $61, the value of the $50 call would rise to $10, and the value of the $60 call would remain at $1. Premiums base their price on the spread between the stock's current market price and the strike price. The short put generates income from the premium associated with writing the option. The total profit would be $900 (or $9 x 100 shares). Learn how to trade call and put bull spreads as an options trading strategy, including examples. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. An options trader believes that XYZ stock trading at $43 is going to rally soon and enters a bull put spread by buying a JUL 40 put for $100 and writing a JUL 45 put for $300. Let’s see how these positions play out at expiry. 2 put option positions are used to make up a Bull Put Spread. Trade Example #1: Maximum Loss Bull Put Spread The first example we'll investigate is a situation where a trader sells an at-the-money put spread. Take an arbitrary stock ABC currently priced at $100. An options trader believes that XYZ stock trading at $42 is going to rally soon and enters a bull call spread by buying a JUL 40 call for $300 and writing a JUL 45 call for $100. It is one of the two main types of options, the other type being a call option.for a premium of $15. Retrieved from " https://en.wikipedia.org/w/index.php?title=Bull_spread&oldid=977082156 " The strike price is the price at which the option gets converted to the stock at expiry. The bull call spread reduces the cost of the call option, but it comes with a trade-off. The investor will sell the shares bought with the first, lower strike option for the higher, second strike price. Simply put, it will be the total premium invested in buying the lower leg or lower strike price of this call spread strategy. Here’s a bull call example to give you a better idea of how this method works: On January 18, 2019, Tesla shares closed at $302.26.Let’s assume you were bullish and think it can bounce over the next 2-3 weeks. Click to Enlarge. Futures Spread Pricing Spreads are priced as the difference between the two contracts. Choose the asset you believe will appreciate over a set period of days, weeks, or months. Consider a position made up of two legs (options): Buy a $45 strike put option for $1.87 per share, or $187 total cost (assuming 100 shares per contract as for standard US equity options). An expensive premium might make a call option not worth buying since the stock's price would have to move significantly higher to offset the premium paid. This has been a guide to What is Bull Call Spread and its definition. Following some good news about a new drug that got approved by the FDA, Bill believes that the stock price will rise over the next two months to $194. At the same time, the i… CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. A strike price is an option a trader purchases, with no requirement to execute, which guarantees them the ability to purchase or sell at the price they purchased. Bull Put Spread Example. Here we discuss the calculation of bull call spread along with an example, advantages, and disadvantages. A bull call spread is an options trading strategy designed to benefit from a stock's limited increase in price. A collar, commonly known as a hedge wrapper, is an options strategy implemented to protect against large losses, but it also limits large gains. For both these strikes, the expiration date is the same. Both puts have the same … If at expiry, the stock price has risen and is trading above the upper strike price—the second, sold call option—the investor exercises their first option with the lower strike price. Let’s assume the following strike prices trading at the following prices. The Bull Put Spread – A Deeper Look. Usually, an option at a lower strike price is bought and one … It can be created by using both puts and calls at different strike prices. You can learn more about derivatives trading from the following articles –, Copyright © 2020. The primary benefit of using a bull call spread is that it costs lower than buying a call option. Most often, during times of high volatility, they will use this strategy. A debit spread is a strategy of simultaneously buying and selling options of the same class, different prices, and resulting in a net outflow of cash. In the bull call spread strategy case, your breakeven point is the sum of the strike price of the option purchased and the net premium paid (explained above). Called the break-even point (BEP), this is the price equal to the strike price plus the premium fee. The offers that appear in this table are from partnerships from which Investopedia receives compensation. However, the downside to the strategy is that the gains are limited as well. 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