Call Debit Spread, or a Bull Call Spread, defines a bullish strategy involving a pair of simultaneous call option strike prices.
First, you purchase a ‘one at the money’, or an ‘out of the money’ call. Second, you make a sell of one call a little further away from the money than the call you bought.
In a bull call spread, you are buying an option on a particular security, at a certain strike price. This is as you sell that same option, with a similar date of expiration, at a higher strike price.
The core bull call spread tenet is that premiums on options bought are higher than those sold. They also call for upfront investments. This is the reason an alternative name is Debit Call Spread.
Buying options for lower strike prices is a long call, while a sale at a higher strike price is a short call. The two transactions become the call legs of your spread.
Thanks for coming here,
This bullish technique entails the concurrent acquisition and disposal of options with a common expiration month and primary futures contract. It offers two earning opportunities. The first is when the primary securities rise in value. Alternatively, you can maximize the time decay on your OTM options.
The idea is aligning the underlying security’s value with your written options’ strike price. Your gains are limited if the asset price jumps over the short call’s strike price. What’s more, your losses are limited when the asset price sinks below the long call’s strike price.
Despite the limited profits, you’re able to control your earnings by selecting your written contracts’ strike price. So to say, your return on investment is higher than choosing to buy calls directly. Another benefit is knowing your possible losses while placing the spread. The maximum risk corresponds to spread’s cost plus commission. A loss occurs if you hold the position to expiration and both calls lapse worthless.
Hi Dennis, thanks for joining us.
A Bull Call Spread is an options trading strategy used by traders to make a profit from a gradual price rise in the underlying stock.
The strategy is made up of one long call with a lower strike price and one short call with a higher strike price. Both of them involve the same underlying stock and have the same expiry date.
It is set up for net costs and profits as the price of the underlying stock increases. The profit is limited in case the share price rises higher compared to the strike price of the short call, and the possible loss is limited if the stock price drops below the strike price of the long call.
While the main advantage of the strategy is its ability to cap the losses, the main disadvantage is that the gains are capped as well.
You need to be a member in order to leave a comment
Sign up for a new account in our community. It's easy!
Already have an account? Sign in here.