To implement a bull call spread involves choosing the asset that is likely to experience a slight appreciation over a set period of time (days, weeks, or months). The net difference between the premium received for selling the call and the premium paid for buying the call is the cost of the strategy. The term “bull spread” refers to the options strategy designed to earn profit from a moderate increase in the underlying security price. This strategy involves simultaneous purchase and sale of either call or put options with the same underlying asset and expiry date but at different strike prices. Whether constructed with a call or put options, the opportunity with a higher strike price is sold, and the one with a lower strike price is purchased. The maximum profit for this spread will generally occur as the underlying stock price rises above the higher strike price, and both options expire in-the-money.
Which is better bull call spread or bull put spread?
A Bull Put Spread Options strategy is limited-risk, limited-reward strategy. This strategy is best to use when an investor has neutral to Bullish view on the underlying assets. The key benefit of this strategy is the probability of making money is higher as compared to Bull Call Spread.
Therefore, the maximum profit and maximum losses are $4 and $1, respectively, in this case, too, due to call-put parity. Potential profit is limited to the difference between strike A and strike B minus the net debit paid. Regardless of how you proceed, I hope this article has helped provide some insight into how these two strategies match up. In the final example, we’ll examine a long call spread example that ends up with its maximum profit potential. In this example, we’ll look at a situation where a trader buys an out-of-the-money long call spread.
Maximum Potential Loss
Ideally, a large move up in the underlying stock price occurs quickly, and an investor can capitalize on all the remaining extrinsic time value by exiting the position. Assume that the long call is in-the-money and that the short call is roughly at-the-money. Exercise (stock purchase) is certain, but assignment (stock sale) isn’t. If the investor guesses wrong, the new position on Monday will be wrong, too. Say, assignment is expected but fails to occur; the investor will unexpectedly be long the stock on the following Monday, subject to an adverse move in the stock over the weekend.
Factoring in net commissions, the investor would be left with a net loss of $7. Factoring in net commissions, the investor would be left with a net gain of $3. Chris started the projectfinance YouTube channel in 2016, which has accumulated over 25 million views from investors globally. Chris Butler received his Bachelor’s https://www.bigshotrading.info/ degree in Finance from DePaul University and has nine years of experience in the financial markets. The 7900 CE option also has 0 intrinsic value, but since we have sold/written this option we get to retain the premium of Rs.25. Given all this there is a high probability that the stock could stage a relief rally.
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If the long and short call are both in-the-money at expiration, the assignments offset, resulting in no stock position. If only the long call is in-the-money at expiration, the resulting position is +100 shares of stock per call contract. A different pair of strike prices might work, provided that the short call strike is above the long call’s.
Selling or writing a call at a lower price offsets part of the cost of the purchased call. This lowers the overall cost of the position but also caps its potential profit, as shown in the example below. Before trading options, please https://www.bigshotrading.info/blog/what-is-bull-call-spread/ read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. Options involve a high degree of risk and are not suitable for all investors.