Bull Call Spread – Bullish Options Trading Strategy
A “bull call spread” occurs when a modest increase in the price of the asset is expected. It is achieved by purchasing call options at a specific strike price while also selling the same number of calls of the same asset and expiration date, but at a higher strike. The maximum profit in this strategy is the difference between the strike prices of the long and short options, less the net cost of options. Most of the time, a bull call spread is a vertical spread.
The bottom line of a bull call spread is that the investor is able to buy a stock at a lower price and in turn sell at a higher price, thereby making a profit. In such a case the stocks belong to the same company but have different strike prices. This allows the investor to realize a profit by leveraging the varied strike prices against the actual price of the stock.
In this example of a bull call spread assume that a stock is trading at $28. The investor purchased one call option with a strike price of $30 and sold one call option with a strike price of $35. If the price of the stock jumps up to $45 then the investor must provide 100 shares to the buyer of the short call at $35. This is where the purchased call option allows the trader to buy the shares at $30 and sell them for $35 instead of buying the shares at the market price of $45 and selling them for a loss. A bull call spread is used by traders to create a profit when a loss seems inevitable.
While this is a profitable technique, the bull call spread involves strike and call prices as well as the typical monitoring of stock prices to be familiar with their movements. The easiest way to create a bull spread is to use a call option at or near the current market price. When buying the lower priced call and selling a higher priced one a bull call spread has been created.
In addition to learning about the bull call spread don’t forget to also learn about buying calls and selling puts.
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