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Dennis Mayer

What is a Bull Call Spread?

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A Bull Call Spread is a trading strategy that involves taking outan equal size long position and short position in Call Options in the same underlying instrument. The possibility of buying and selling the same thing and yet still generating a profit comes about through the use of options with different Strike prices. The objective of the strategy is to capture profits made from a moderate change in the price of the underlying asset and uses options with the same expiration date. It is a strategy that involves limiting losses and also limiting gains. The strategy requires two trades to be placed but is best explained by first breaking them out and studying them individually.

Long Call Options

Position: Long Call Options Expiry date:  21/12/2018 Premium: $25 Strike Price: $860 The premium (price paid for the option) is $25. When that cost is factored in the Call Options will become profitable when the price of the underlier exceeds $885. Any further price increases in the underlier will result in further profits.

Short Call Options

Position: Short Call Options Expiry date:  21/12/2018 Premium: $15 Strike Price: $880 The premium received from selling the options is $15. When that revenue is factored in, this position will be profitable up to the point where the price of the underlier exceeds $885. Any further price increases in the underlier will result in further losses.

Profit / Loss Analysis

The Bull Call Spread strategy has two positions that cancel each other out once the price of the Underlier exceeds both of their Strike prices. After that point, any gain in one is equal and opposite to the loss made in the other. The fact that they have different Strike prices means that the strategy can make a profit if the underlier makes a moderate gain in price. When the price of the underlier is equal to or above $870 then the strategy is profitable. The total gain is capped by the presence of Long and Short positions in the same option, but at the same time the total loss is also capped. Should the underlier trade at prices under $870 then the trade will make a loss of up to $10. The $10 figure being the difference between the premium received on the sell trade and the premium paid on the buy trade. The Bull Call Spread is a type of Vertical Spread because it involves buying and selling the same type of option with the same expiry date, but with different Strike prices. A Bear Put Spread involves using two trades in Call options to anticipate bearish price action in the underlier. Alternatively, Bull Put Spread and Bear Put Spread are bullish or bearish trading strategies that can be put on using Put options. The purpose of vertical spread strategies is to limit losses should the price action not turn out to be what you expected. The trade-off is that gains are also limited. Whilst the volatility of returns is reduced using the strategy does nothing to mitigate the risk that you might make the wrong call on which way the market is going.

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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.
 

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Hello Dennis,

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.
 

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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.
 

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