Forex Trading

Bull Spread Call

risk of loss

A is an options strategy designed to benefit from a stock’s limited increase in price. Straddle refers to an options strategy in which an investor holds a position in both a call and put with the same strike price and expiration date. 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. The trader therefore buys five contracts of the $38 calls – trading at $1 – expiring in one month, and simultaneously sells five contracts of the $39 calls – trading at $0.50 – also expiring in one month. The broker will charge a fee for placing an options trade and this expense factors into the overall cost of the trade.


Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, 125 S. If your forecast was incorrect and the stock price is approaching or below strike A, you want implied volatility to increase for two reasons. First, it will increase the value of the option you bought faster than the out-of-the-money option you sold, thereby increasing the overall value of the spread. The bull call spread is a debit spread as the difference between the sale and purchase of the two options results in a net debit.

The level of risk in a bull call spread is limited to the initial premium paid for purchasing the position. The chances of maximum loss are when the underlying reaches the lower strike price or below. The maximum risk of the bullish call spread is limited to the total premium paid in buying a low strike price call. Simply put, it will be the total premium invested in buying the lower leg or lower strike price of this call spread strategy.

You’ll begin to profit once the stock rises above breakeven, which is calculated by adding the net debit to the purchased call strike. In this example, profits will accrue on a move beyond $26.27 (25 + 1.27). As you can easily see, there are some important differences in the potential returns and risk profiles of these two strategies. Naked CallA naked call is a high-risk options strategy wherein the investor sells a call option without possessing the underlying stock. This CORE advanced long call spread sample bot template is designed for traders who have a basic understanding of options trading and the autotrading platform. Regardless of the theoretical price impact of time erosion on the two contracts, it makes sense to think the passage of time would be somewhat of a negative.

Maximum Potential Loss

A bull call spread is an option strategy that involves the purchase of a call option and the simultaneous sale of another option with the same expiration date but a higher strike price. It is one of the four basic types of price spreads or “vertical” spreads, which involve the concurrent purchase and sale of two puts or calls with the same expiration but different strike prices. The bull call spread reduces the cost of the call option, but it comes with a trade-off. The gains in the stock’s price are also capped, creating a limited range where the investor can make a profit. Traders will use the bull call spread if they believe an asset will moderately rise in value. Most often, during times of high volatility, they will use this strategy.

A call option is a contract that gives the option buyer the right to buy an underlying asset at a specified price within a specific time period. For MIS+ product, while placing order user places first leg order along with compulsory Stop loss trigger order (i.e second leg) & optional book profit trigger order . First leg order gets tagged with second/third leg order and profit and loss will be calculated based on such tagging and will be computed based on the pair of trades that get executed through the product. Moreover, the breakeven price is lowered when implementing a bull call spread. Whether the stock falls to $5 or $50 a share, the call option holder will only lose the amount they paid for the option spread ($42). The trader expects the stock to move above $52.92 but not higher than $55.00 in the next 30 days.

strike prices

If at expiry, the stock price declines below the lower strike price—the first, purchased call option—the investor does not exercise the option. The option strategy expires worthlessly, and the investor loses the net premium paid at the onset. If they exercise the option, they would have to pay more—the selected strike price—for an asset that is currently trading for less. A bullish call spread option, also known as a bull call spread option, is a trading strategy that aims to capitalize in an increase in the price of a given market or asset. The bull call spread option strategy consists of two call options that create a range that outlines a lower strike point and an upper strike point. The bullish call spread strategy helps to cap loss if the price of an asset drops, however, the strategy also caps the amount of potential gains in case of a price increase.

When to Use a Bull Call Spread?

Note, however, that the stock price can move in such a way that a volatility change would affect one price more than the other. Meet some of the most important greeks—delta, gamma, theta, vega, and rho—and see how they can be used in your options trading. Learn how to measure volatility using the Cboe VIX, rule of 16, and skew in your options trading.

Since the strategy involves being long one call and short another with the same expiration, the effects of time decay on the two contracts may offset each other to a large degree. The following strategies are similar to the bull call spread in that they are also bullish strategies that have limited profit potential and limited risk. Compare Bull Call Spread and Bull Put Spread options trading strategies. Find similarities and differences between Bull Call Spread and Bull Put Spread strategies. Trader #1 decides to purchase a long call while Trader #2 decides to establish a bull call spread. Let’s start by evaluating Trader #1’s long call strategy using some common strategy attributes and options Greeks, such as Delta, Theta and Vega.

option spread

In other words, the long call spread player is still optimistic on the shares, but has a rather specific target in mind as to how high the stock will rise over the lifespan of the trade. That’s immediate capital that we can spend today or, more likely, that we will want to keep in reserve. Because this represents the MAXIMUM profit that we will earn from this trade, which we will get to keep in our accounts so long as the price of MSFT is above $240 one month from now. As always with options, the puts are just a mirror image of the call trade.

But, it is also possible to create the spread with other strike prices. Spread strategies are simple options strategies for traders to implement. These multi-leg strategies involve two or more options transactions.

Amongst all the strategies, the bull call spread is one the most popular one. The strategy comes handy when you have a moderately bullish view on the stock/index. Butterfly spread is an options strategy combining bull and bear spreads, involving either four calls and/or puts, with fixed risk and capped profit. To put it another way, if the stock fell to $30, the maximum loss would be only $1.00, but if the stock soared to $100, the maximum gain would be $9 for the strategy. The below-mentioned trading situations are apt for implementing a bull spread strategy.

A spread strategy like the Bull Call Spread works best when a trader’s outlook towards the stock or index is moderate and not aggressive. For instance, a trader can have a moderately bullish or bearish outlook on the stock or the index. It’s important to note that purchasing out-of-the-money call spreads is a low probability trade because the breakeven price is above the stock price at entry. Additionally, the profit potential is greater than the loss potential.

How To Manage a Bull Call Spread

The maximum profit from the strategy is limited to the differences between the strike prices minus the net spread . The strategy breaks even at the strike price of the long call plus the net premium paid. For the long call, the options trader pays a premium which is the maximum loss from the long call. Bull Call Spread is an options trading strategy that involves the purchase of two call options with the same expiration and different strike prices. In the strategy, the trader buys one call option with a lower strike price and sells another call option with a higher strike price. The strategy has a limited potential profit and loss as it has a ceiling for the profits and a floor for losses.

  • ProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs.
  • While you think a near-term rally is likely, you’re wary of the overhead $30 level.
  • As a result, the stock is bought at the lower price and simultaneously sold at the higher price.
  • Risk-reward RatioThe risk-reward ratio is the measure used by the investors during the trading for knowing their potential loss to the potential profit.

The disadvantage is that the premium received is smaller, the higher the short call’s strike price. Up to a certain stock price, the bull call spread works a lot like its long call component would as a standalone strategy. However, unlike with a plain long call, the upside potential is capped. That is part of the tradeoff; the short call premium mitigates the overall cost of the strategy but also sets a ceiling on the profits. It contains two calls with the same expiration but different strikes.

This potential loss will be realized if XYZ settles at or below $25 upon expiration, while smaller losses will be incurred if the stock remains below breakeven at $26.27. To trade these expectations, you could play a long call spread using XYZ’s 25- and 30-strike calls. You would buy to open the XYZ 25 call, which is asked at 1.42, and simultaneously sell to open the XYZ 30 call, which is bid at 0.15. Since you shelled out 1.42 for the long call and collected a premium of 0.15 for the short call, your net debit on the spread is 1.27. Multiplied by 100 shares per contract, that’s a total cash outlay of $127 for the spread, plus any brokerage fees. See our Pricing page for detailed pricing of all security types offered at Firstrade.

Read up on historic examples or better yet, contact one of our experienced RJO Futures Brokers. Bruce Harper, CFA, has been trading options personally and professionally for over 30 years. He has worked in multiple Treasury and Corporate Finance roles for Fortune 500 companies.