Bull Call Spread Reducing Money Paid In A Bullish Trade

An expensive premium might make a call option not worth buying since the stock’s price would have to move significantly higher to offset the premium paid. Called the break-even point (BEP), this is the price equal to the strike price plus the premium fee. With a bull call spread, the losses are limited reducing the risk involved since the investor can only lose the net cost https://www.bigshotrading.info/blog/what-is-a-pip-in-forex-and-are-they-useful/ to create the spread. However, the downside to the strategy is that the gains are limited as well. Assignment of a short call might also trigger a margin call if there is not sufficient account equity to support the short stock position. Similar to the other bear vertical spread options, you have limited loss potential at the upside and limited profit at the downside.

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. When a Bull Call Spread is purchased, the trader instantly knows the maximum amount of money they can possibly lose and the maximum amount of money they can make. In writing the two options, the investor witnessed a cash outflow of $10 from purchasing a call option and a cash inflow of $3 from selling a call option.

The Bull Call Spread Options Trading Strategy

Therefore, we will have to pay $113 for the bought strike, while we will receive $18 for the sold strike. Here are another bunch of charts; the only difference is that for the same move (i.e 3.75%) these charts suggest the best possible strikes to select assuming you are in the 2nd half of the series. 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.

Assignment of a short call might also trigger a margin call if there is not sufficient account equity to support the short stock position created by the option assignment. Specifically, buying a call expresses your bullish sentiment and achieves the goal of limiting your risk exposure to the downside. By selling a higher strike call, you offset some of the cost of the long position and also trade off some of the upside gain potential. Before investing in an ETF, be sure to carefully consider the fund’s objectives, risks, charges, and expenses. The maximum loss occurs when the security trades below the strike price of the long call.

Bull Call Spread: Option Strategy Payoff Calculator

This maximum profit is realized if the stock price is at or above the strike price of the short call (higher strike). A bull call spread consists of one long call with a lower strike price and one short call with a higher strike price. Both calls have the same underlying stock and the same expiration date. A bull call spread is established for a net debit (or net cost) and profits as the underlying stock rises in price. Profit is limited if the stock price rises above the strike price of the short call, and potential loss is limited if the stock price falls below the strike price of the long call (lower strike).

• Do note you can create a bull call spread with 2 options, for example – buy 2 ATM options and sell 2 OTM options.
• Bottom line
  If the trader expects the stock to remain within the particular range till the expiration date, then bull call spread can be a good deal.
• Cell F9 is the price for which the lower strike call option is bought when opening the position.
• We then multiply that by 10 to account for the time value to get $1050, or our total premium paid.
• This means that as time goes by, our position will lose value, and therefore, the profit and loss curve will be smaller and smaller.

The short call will have a higher premium to be collected, and the long call will have a lower premium to be paid, creating an initial profit called net credit. To help us correctly identify is the asset is going bull call spread calculator to be bullish or bearish, we highly recommend you to use some kind of trend follower, such as the supertrend technical indicator. In this way, we will make sure that the price is going to keep bullish.

Outcome 3: Breakeven

On the other hand, the stock can go to zero in the case of a put option; thus, if you are short, your losses can be substantial (but limited). Search a symbol to visualize the potential profit and loss for a bull put spread option strategy. This means that as time goes by, our position will lose value, and therefore, the profit and loss curve will be smaller and smaller. So, the expiration date, the bull call debit spread payoff diagram will look like this. The bull call debit spread strategy consists of buying a call contract with a strike price that is below the strike price of the second call contract sold.

It is the characteristics of each contract that defines a limited maximum profit and a maximum loss. An option spread is a trading strategy where you interact with two call contracts or two put contracts of different strike prices. The difference between the lower strike price and the higher strike price is called option spread. If you were to buy the ATM option you would have to pay Rs.79 as the option premium and if the market proves you wrong, you stand to lose Rs.79.

Early assignment of stock options is generally related to dividends. Now that you have the premium, you can calculate your max profit and losses. The max loss is calculated by simply multiplying the (net premium spent). Review the Characteristics and Risks of Standardized Options brochure (PDF) before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Options trading involves risk and is not suitable for all investors.

• Some premiums may be so high that they make buying the call option worthless because it would take a major move to hit your breakeven point (BEP).
• The Main View shows the Volume and Open Interest for each option, while the Dividend & Earnings View can be used to highlight strategies with upcoming dividends and earnings.
• The bull call spread, as with any option spread, can be executed as a “unit” in one single transaction, but not as separate buy and sell transactions.
• Legs 3 and 4 are unused; their instrument types should be set to None (D11, D12).
• In order to place a call option, the investor has to pay a premium.
• The calculations, information, and opinions on this site are for educational purposes only and are not investment advice.
• This page demonstrates how to set up and work with a bull call spread (long call spread, debit call spread) position in the Option Strategy Payoff Calculator.

Bullish investors often use this when trading futures, bonds, and equities. This strategy is categorized as a debit spread, not to be confused with a credit spread. A bull call spread tends to be profitable when the underlying stock increases in price.