Bull Call Spread

Bull Call Spread

Post By - Manav Saini
Review By : Rohan Sharma
Updated on : October 26, 2021

Basics Concepts – Bull Call Spread

Description – Bull Call Spread

The Bull Call is a vertical spread strategy that creates a net debit in your account.
You buy a near At the money (ATM) call and sell a higher strike (typically OTM) call with the same expiration.
The net effect of the strategy is to bring down the cost and breakeven on the trade compared to simply buying the long call.
The Bull Call Spread requires a bullish outlook because you will make a profit only when the stock price rises.
if the stock falls below the lower (bought) strike, you make your maximum loss;
if the stock rises to the higher (sold) strike, you make your maximum profit. In between these points, your breakeven point lies at the lower strike plus the net debit.
Buy lower strike calls.
Sell the same number of higher strike calls with the same
expiration date

Introduction - Bull Call Spread

Outlook

With a Bull Call, your outlook is bullish. You need a rise in the stock price.

Rationale

To execute a bullish trade for a capital gain while reducing your maximum risk.
The sold calls will have the effect of capping your upside but also reducing your cost basis, risk, and breakeven points.

Net Position

This is a net debit transaction because your bought calls will be more expensive than your sold calls, which are further out of the money.
Your maximum risk on the trade itself is limited to the net debit of the bought calls less the sold calls.

Effect of Time Decay

Time decay is helpful to this position when it is profitable and harmful when it is loss-making.

Time Period to Trade

It’s safest to trade this strategy on a longer-term basis

Breakeven [Lower strike net debit]

Steps to Trading a Bull Call Spread

Steps In

Try to ensure that the trend is upward and identify a clear area of support.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
If the stock falls below your stop loss, then sell the Long Call, and if you’re not permitted to trade Naked Calls, then unravel the entire position.
In any event, look to unravel the trade at least one month before expiration, either to capture your profit or
to contain your losses.

Exiting the Trade - Bull Call Spread

Exiting the Position

With this strategy, you can simply unravel the spread by buying back the calls you sold and selling the calls you bought in the first place.
Advanced traders may leg up and down as the underlying asset fluctuates up and down.

Mitigating a Loss

Unravel the trade as described previously.
Advanced traders may choose to only partially unravel the
spread leg-by-leg.

Advantages and Disadvantages

Advantages

Reduced risk, cost, and breakeven point for a medium- to long-term bullish trade as compared to buying a call alone.
Capped downside (although still 100% of the outlay).
The farther away from expiration you are, the more downside protection you have in the event of the stock declining rapidly.

Disadvantages

The higher yields only arise if you select significantly higher strikes Uncapped downside if the stock rises.
Capped upside if the stock rises.

Share this Content

Derivatives Analysis

Advanced Option Strategy