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Bull call spread stock option trading strategy

 

What is a bull call spread?

 

 

The bull call spread option trading strategy (debit spread) is a bullish option position in which a trader or investor may wish to initiate because he or she believes that there may be an increase in the underlying security.

 

The bull call spread is a very popular bullish option trading strategy and should only be implemented when fair consideration has been given to proper risk management.

 

The bull call spread consists of purchasing an "at the money" or "out of the money" call (spread may also be performed with in the money options), and simultanously selling a further out of the money call.

 

A bull call spread is a directional trade in which achieves its maximum profit when the underlying stock increases beyond the short strike.

 

The maximum loss on the trade is limited to the net debit paid for the spread.

 

One of the benefits of the bull call spread option strategy is the fact that by selling the short Call, you are in fact reducing the cost of the long call option which adds to the attractiveness of the overall position, but you also loose all potential profits above the short strike.

 

An important consideration when implementing the bull call spread option strategy is the fact that time decay can have a negative impact on the position. Every day that passes by further erodes the time (measured through theta) portion of the long call options price. This decay has a positive impact on the short call.

 

Also keep in mind that any rise in implied volatility (IV) can have a positive impact on the bull call spread. (Implied volatility is measured through Vega).

 

(Theta and Vega are very important concepts regarding

 

The chart above is an illustration of the following example.--

 

~Buy 1 35 strike call @ $10.00 ask.

 

~Sell 1 45 strike call @ $5.00 bid.

 

~Total cost excluding commission=

$500.

 

~Break even point at expiration=

Lower strike (35.00)+

Price paid ($5.00)=$40.00

 

~Maximum profit = difference between strike prices= ($10.00) - The net debit ($5.00) = $500

 

~Maximum loss= the net debit= $500

 

 

This example illustrates holding the bull call spread option position through the contracts expiration cycle. Remember, at expiration, all that is left in the options premium is the intrinsic value of the option contract.

 

Notice how your profits are capped to the short strike.

 

Also notice how your maximum loss on the trade is also capped to the price paid for the spread.

 

There will always be trade-offs to make, so to speak. The bull call spread option strategy offers very much opportunity. Through the proper risk management, knowing the reasons why you entered the trade, as well as your exit strategy, combined with the ability to make the necessary adjustments. One will be well on their way to trading the bull call spread option strategy successfully.