The choice is a matter of balancing risk/reward tradeoffs and a realistic forecast. Consider a hypothetical stock BBUX is trading at $37.50 and the option trader expects it to rally between $38 and $39 in one month’s time. Should the stock increase to $61, the value of the $50 call would rise to $10, and the value of the $60 call would remain at $1.
You just need to enter the values for your option in this sheet to get a representation of your payoff. This is not an offer or solicitation in any jurisdiction where Firstrade is not authorized to conduct securities transaction. Any specific securities, or types of securities, used as examples are for demonstration purposes only. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.
Bull Call #3 Results
Option investors can rapidly lose the value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval https://www.bigshotrading.info/blog/what-is-bull-call-spread/ on eligible accounts. Please read the Characteristics and Risks of Standardized Options before trading options. All investments involve risk, and not all risks are suitable for every investor.
Alternatively, if the underlying stock price is closer to the higher strike price of the written call, profits generally increase at a faster rate as time passes. The break-even point would be the long call strike plus the premium paid. Because you are buying one call option and selling another, you are “hedging” your position. You have the potential to make a profit as the share price rises, but you are giving up some profit potential—but also reducing your risk—by selling a call. One advantage of the bull call spread is that you know your maximum profit and loss in advance. In a bull call spread, the premium paid for the call purchased (which constitutes the long call leg) is always more than the premium received for the call sold (the short call leg).
What is a bull call spread?
You can close your position at any time prior to expiration if you want to take your profits at a particular point, or cut your losses. For example, if a $5 wide put debit spread centered at the same $50 strike price costs $1.00, an additional $100 of risk is added to the trade, and the profit potential decreases by $100. Bull call debit spreads can be entered at any strike price relative to the underlying asset. In-the-money options will be more expensive than out-of-the-money options. The further out-of-the-money the spread is purchased, the more bullish the bias. For example, an investor could buy a $50 call option and sell a $55 call option.
- For this strategy, the net effect of time decay is somewhat neutral.
- Traders will use the bull call spread if they believe an asset will moderately rise in value.
- The combination of a long call and short call is referred to as a spread trade.
- Filter settings should be adjusted to match your trading requirements.
- Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options.
- Advisory accounts and services are provided by Webull Advisors LLC (also known as “Webull Advisors”).
Netting the amounts together, the investor sees an initial cash outflow of $7 from the two call options. Generally speaking in a bull call spread there is always a ‘net debit’, hence the bull call spread is also called referred to as a ‘debit bull spread’. Fidelity is not recommending or endorsing this investment by making it available to its customers. Although more complex than simply buying a call, the bull call spread can help minimize risk while setting specific price targets to meet your forecast. We have provided an example below to give you an idea of how this strategy works in practice. Please be aware that this example is purely for the purposes of illustrating the strategy and doesn’t contain precise prices and it doesn’t take commission costs into account.
Then, the 1200 strike call is out of the money and has no value and 1160 strike call is in the money and is worth the difference between the INFY stock price and 1160. If the underlying security continues to go up in price beyond that point, then the written contracts will move into a losing position. Although this won’t cost you anything, bee causthe options you own will continue to increase in price at the same rate.
- All information and data on the website is for reference only and no historical data shall be considered as the basis for judging future trends.
- The bull call spread is one of the most commonly used options trading strategies there is.
- Should the stock increase to $61, the value of the $50 call would rise to $10, and the value of the $60 call would remain at $1.
- A bull debit spread’s max profit is the spread’s width minus the premium paid.
- Please read the options disclosure document titled “Characteristics and Risks of Standardized Options” Supporting documentation for any claims or statistical information is available upon request.
Additionally, the profit potential is greater than the loss potential. Since the long call is in-the-money at expiration, the trader would end up with +100 shares of stock (per contract) if they did not sell the long call before expiration. Upon selling the long call portion of a bull call spread, it’s wise to buy back the short call. https://www.bigshotrading.info/ Otherwise, the trader will expose themselves to unlimited loss potential. If the stock price is above 155 at expiration, both calls expire in-the-money. At expiration, an in-the-money long call expires to +100 shares, and an in-the-money short call expires to -100 shares, which results in no stock position for the call spread buyer.
Bull Call Spread Strategy
As a result, the initiation of a bull call spread strategy involves an upfront cost – or “debit” in trading parlance – which is why it is also known as a debit call spread. If both options have value, investors will generally close out a spread in the marketplace as the options expire. This will be less expensive than incurring the commissions and transaction costs from a transfer of stock resulting from either an exercise of and/or an assignment on the calls.
If you felt the underlying security would only increase by $2, then you would write them with a strike price of $52. A bull call spread is established for a net debit (or net amount paid) and profits from a rising stock price. 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.