The investor doesn’t care which direction the stock moves, only that it is a greater move than the total premium the investor paid for the structure. Investors may choose to use this strategy when they have a short-term position in the stock and a neutral opinion on its direction. They might be looking to generate income through the sale of the call premium or protect against a potential decline in the underlying stock’s value. 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. They work best in markets where the underlying asset is rising moderately and not making large price jumps.
The difference between a bull call spread and a regular long call is that the upside potential is capped by the short call. If the bull put spread is done so that both the sold and bought put expire on the same day, it is a vertical credit put spread. Your $450 call’s value would surge to $8, and the sold $455 call would carry a $3 intrinsic value. Theory’s all well and good, but let’s dive into a tangible example with Nvidia (NVDA), currently priced at $450 a share. This intuitively makes sense, given that there is a higher probability of the structure finishing with a small gain.
For this reason, traders would use it on stocks where they have a slightly bullish view. The risk here is that the trader might get assigned and then the stock makes an adverse movement before he has had a chance to cover the assignment. Like vega, theta also changes depending on where the stock price is trading. The purpose of the short call is to mitigate some of the overall costs of the strategy at the expense of putting a ceiling on the profits.
The intrinsic value of both 7700 PE and 7900 PE would be 0, hence both the potions would expire worthless. For a market that has been trending higher on the longer time frames, a pullback into a support level may provide an opportunity to get long the market before it resumes the trend higher. See our Terms of Service and Customer Contract and Market Data bull call spread strategy Disclaimers for additional disclaimers. Always do your own careful due diligence and research before making any trading decisions. You are now leaving the SoFi website and entering a third-party website. SoFi has no control over the content, products or services offered nor the security or privacy of information transmitted to others via their website.
Also, see our guide to understanding the basics of reading candlestick charts and option trading strategies. In percentage terms, the bull call spread is 30% cheaper than purchasing only the call option. The following is the profit/loss graph at expiration for the Bull Call Spread in the example given on the previous page. Moreover, if the trader is exceptionally bullish and thinks the stock will move up to $60, then the trader should just buy a call rather than purchase a Bull Call Spread. If the trader expects the stock to move higher, but only $1 higher, then buying the $52.50/$55.00 Bull Call Spread would be foolish.
The risk is most acute when a short option is in-the-money and has very little time value left. When the stock is above the short call, theta benefits the trade as the position moves closer to the maximum gain each day. When this occurs, both options expire in-the-money and you make a profit equal to the spread less the initial debit when you entered the position.
Bull call spreads are a popular options trading strategy used by investors who are moderately bullish on a particular underlying asset. This strategy involves buying a call option with a lower strike price and simultaneously selling a call option with a higher strike price, both with the same expiration date. The goal is to profit from an upward price movement in the underlying asset while minimizing the potential for losses. However, this strategy also caps potential losses to the net premium paid.
What about mid caps stocks such as Yes Bank, Mindtree, Strides Arcolab etc? One can attempt to quantify the ‘moderate-ness’ of the move by evaluating the stock/index volatility. You need to have a specific margin in your trading account to enter into bull call spread or https://www.bigshotrading.info/ else you will not allow placing the trade. You can calculate the margin required by using your broker terminal. To understand it better, let us take an example of Tata motors which is priced at Rs 180 bought for Rs 2 and selling it at Rs 190 for Rs 1 in a debit of Rs 1.
Here are another bunch of charts; the only difference is that for the same move (i.e 3.75%) these charts suggest the best possible strikes to select assuming you are in the 2nd half of the series. Based on volatility I have devised a few rules (works alright for me) you may want to improvise on it further – If the stock is highly volatile, then I would consider a move of 5-8% as ‘moderate’. However if the stock is not very volatile I would consider sub 5% as ‘moderate’. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.