Call Bull Spread
| B/S | Strike | Type | Price |
|---|---|---|---|
| Buy 1 | $39 | Call | $1.70 |
| Sell 1 | $41 | Call | $0.73 |
| Net Debit | $97 | ||
Call Bull Spreads are more losely called Long Call Spreads and are made up of long call option and a short call in the same expiration month but where the short call has a higher strike price than the long.
The Max Loss is limited to premium paid for the long option minus the premium received for the short option.
The Max Gain is limited to the difference between the two strike prices minus the net premium paid for the spread.
Characteristics
When to use: When you are mildly bullish on market price and/or volatility.
You can see from the above graph that a call bull spread can only be worth as much as the difference between the two strike prices. So, when putting on a bull spread remember that the wider the strikes the more you can make. But the downside to this is that you will end up paying more for the spread. So, the deeper in the money calls you buy relative to the call options that you sell means a greater maximum loss if the market sells off.
Like I mentioned, a call bull spread is a very cost effective way to take a position when you are bullish on market direction. The cost of the bought call option will be partially offset by the premium received by the sold call option. This does, however, limit your potential gain if the market does rally but also reduces the cost of entering into this position.
This type of strategy is suited to investors who want to go long on market direction and also have an upside target in mind. The sold call acts as a profit target for the position. So, if the trader sees a short term move in an underlying but doesn't see the market going past $X, then a bull spread is ideal. With a bull spread he can easily go long without the added expenditure of an outright long stock and can even reduce the cost by selling the additional call option.
Call Bull Spread Greeks
Delta
Gamma
Vega
Theta
20 Comments
Peter May 20th, 2020 at 6:44am
Hi Franc, $40 in this example.
Franc May 19th, 2020 at 4:14pm
Hi,
what is the ATM level of the stock?
THanks
Peter April 23rd, 2020 at 6:06pm
Hi Franc,
There isn't a stock position in this call spread example; there are only options.
Franc April 23rd, 2020 at 7:47am
Hi,
what is the position of the stock in all these examples?
THanks
Peter September 21st, 2017 at 12:08am
Hi Leonard,
By disarm do you mean exit? You can always exit a spread by entered the opposite orders into the market to close out the spread. Please let me know if I have misunderstood.
leonard September 18th, 2017 at 12:18pm
hello, I wanted to consult how to get out of this strategy or how I disarm it, greetings
Peter January 12th, 2017 at 5:26pm
Hi Amol,
Yes, if the direction is wrong, you will lose capital. For "long" options/spreads, the most you can lose is the total premium you have paid to buy the option/spread. So, to achieve the lowest loss or lowest entry point to risk, is simply the cheaper the option.
AMOL G. December 29th, 2016 at 9:22am
If the direction goes wrong we may loose some capital , is there any strategy with lowest loss ?
Peter April 12th, 2012 at 10:35pm
Yes - otherwise it will be a time spread.
Helena April 12th, 2012 at 9:28am
Do the two options purchased have to have the same expiration date?
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