What Is A Bull Spread

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Because the higher put will be worth more, this transaction creates an immediate, or premium that we will put in our pocket immediately. If you’ve never traded an option spread before, the first part of this series will tell you all you need to do so with complete confidence and understanding of the risks and rewards. The underlier price at which break-even is achieved for the bull call spread position can be calculated using the following formula. 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 .

bull spread

Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

Rolling a Bull Call Debit Spread

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. Assume that the long call is in-the-money and that the short call is roughly at-the-money. If the investor guesses wrong, the new position on Monday will be wrong, too. Say, assignment is expected but fails to occur; the investor will unexpectedly be long the stock on the following Monday, subject to an adverse move in the stock over the weekend.

  • The trader will realize maximum profit if the underlying closes above the short strike on expiration.
  • The put option comes with a strike price of $80 and expires in July 2020.
  • There is no fundamental reason backing the stock price decline, hence there is a good chance that the stock price could revert to mean.
  • Being defined as risk, these strategies can be created using low margins.
  • In addition, although the maximum gains are capped, the investor is protected from downside risk as well.
  • The downside risk for the bull call spread purchase is limited entirely to the total $275 premium paid for the spread no matter how low the SPX index declines.

When the call is worth $20, it’s likely that the long call spread trader closes the position for a profit because there’s only $1 left to make and $20 to lose. You want the stock to be at or above strike B at expiration, but not so far that you’re disappointed you didn’t simply buy a call on the underlying stock. But look on the bright side if that does happen — you played it smart and made a profit, and that’s always a good thing. As always with options, the puts are just a mirror image of the call trade. We basically sell an ATM or slightly OTM Put and buy an even more OTM Put.

This spread makes money if the backwardation widens or nearby prices increase more than deferred prices. 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. Hence it is used by the traders for effectively managing their risk and capital during the trading process. Offset the premium required for buying the other put option hence resulting in a net credit.

Since a bull call spread consists of one long call and one short call, the sensitivity to time erosion depends on the relationship of the stock price to the strike prices of the spread. If the stock price is “close to” or below the strike price of the long call , then the price of the bull call spread decreases with passing of time . This happens because the long call is closest to the money and decreases in value faster than the short call.

Spread Trading Education

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. The trade will result in a loss if the price of the underlying decreases at expiration. The bear call spread options strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.

Bull call debit spreads can be rolled out to a later expiration date if the underlying stock price has not moved enough. To roll the position, sell the existing bull call spread and purchase a new spread at a later expiration date. This requires paying another debit and will increase the risk, but will extend the duration of the trade.

The choice is a matter of balancing tradeoffs and a realistic forecast. Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Multiple leg option strategies will involve multiple commissions. 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. These spreads involve a trader’s view on not just outright price fluctuations but movements in term structure, or the price differentials between months for a commodity market.


As the name suggests, a bull call spread is a bullish strategy, as it profits when the underlying stock price rises. Bull call spreads are debit spreads that consist of buying a call option and selling a call option at a higher price. The strategy looks to take advantage of a price increase from the underlying asset before expiration. Increased implied volatility may also benefit the bull call debit spread. In options trading, a bull spread is a bullish, vertical spread options strategy that is designed to profit from a moderate rise in the price of the underlying security.

His gain is the difference between the higher strike call and the lower strike call minus the initial cost of the contract. In a bull call spread, the premium paid for the call purchased is always more than the premium received for the call sold . 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. A bull call spread is best used during times of high volatility. If you have an inkling that the price of a contract is going to rise moderately, and the market is exceptionally volatile, a bull call spread would be the trade to use. As we mentioned, you want to use this during times of volatility because it caps your max losses.

The maximum profit in this strategy is the difference between the strike prices of the long and short options less the net cost of the options—in other words, the debit. The maximum loss is only limited to the net premium paid for the options. Once you have your bull call spread built, you can now wait out the expiry date you chose when you purchased your long and short call options or sell ahead of the expiration date.

One can enter a more aggressive bull spread position by widening the difference between the strike price of the two call options. However, this will also mean that the stock price must move upwards by a greater degree for the trader to realise the maximum profit. As the name suggests, a bull spread is a bullish options trading strategy designed to earn profit from a slight rise in the underlying security price. Given the put-call parity, it is possible to construct a bull spread strategy using call options or put options. If the stock price has moved down, a bear put debit spread could be added at the same strike price and expiration as the bull call spread. This creates a reverse iron butterfly and allows the put spread to profit if the underlying price continues to decrease.

Benefits and Drawbacks from Using a Bull Put Spread

An aggressive trader may prefer a wider spread to maximize gains even if it means spending more on the position. There is no risk of runaway losses unless the trader closes the long call position – leaving the short call position open – and the security subsequently rises. This profit would be seen no matter how high the SPX index has risen by expiration. The downside risk for the bull call spread purchase is limited entirely to the total $275 premium paid for the spread no matter how low the SPX index declines.

Meet some of the most important greeks—delta, gamma, theta, vega, and rho—and see how they can be used in your options trading. With so many bullish options strategies to choose from, how do you know which is right for your next trade? In this article, we’ll compare two bullish options strategies in order to assist you with the decision-making process.

A bull put spread should only be used when the market is exhibiting an upward trend. The above diagram represents the payoff of the bull spread strategy. Line AB represents the payoff during the worst-case scenario, i.e., when the underlying security price decreases contrary to the bullish expectation of the trader.

Graph 3 – You are at the start of the expiry series and you expect the move in 25 days, then a bull spread with ATM is most profitable i.e 8000 and 8300. It is also interesting to note that the strikes above make a loss. The bull call spread is a two leg spread strategy traditionally involving ATM and OTM options. However you can create the bull call spread using other strikes as well. Amongst all the spread 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.

A debit spread is a strategy of simultaneously buying and selling options of the same class, different prices, and resulting in a net outflow of cash. Butterfly spread is an options strategy combining bull and bear spreads, involving either four calls and/or puts, with fixed risk and capped profit. Finally, if the spread was held through expiration, no stock position would be taken on because the exercise/assignment of the long and short call options cancel each other out. However, it’s possible that the spread trader is assigned on the short call when it’s deep-in-the-money before expiration. Alright, you’ve seen long call spread examples that break even and realize the maximum loss. In the final example, we’ll investigate a long call spread trade that winds up with its maximum profit potential.

Bull call spreads can allow for less risk than just buying straight calls. The bull call spread is a cheaper way to go long when compared to straight call buying. 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.

Also called a long call spread, the bull call spread is similar to the put spread, except it uses calls . The trader purchases a call option on a commodity with a strike price at or below the price of the stock, and then sells a call option with a higher strike price. A bull put spread—or a short put spread—is the difference between two put options .