Bull Call Spread
Bull Call Spread
A Bull Call Spread is an Options trading strategy used when an investor anticipates a moderate rise in the price of an underlying Asset. This strategy involves buying a call option at a lower Strike Price while simultaNeously selling another call option at a higher Strike Price, both with the same expiration date. The goal is to limit potential losses while also capping potential gains.
Example
Suppose an investor believes that the Stock of Company XYZ, currently trading at $50, will rise. The investor buys a call option with a Strike Price of $50 for a premium of $5 and sells a call option with a Strike Price of $55 for a premium of $2. The net cost of the spread is $3 ($5 – $2).
Profit and Loss
The maximum profit occurs if the Stock price rises above the higher Strike Price ($55) at expiration. In this case, the profit is calculated as:
- Max Profit = (Higher Strike – Lower Strike) – Net Cost = ($55 – $50) – $3 = $2
The maximum loss occurs if the Stock price is at or below the lower Strike Price ($50) at expiration:
- Max Loss = Net Cost = $3
Cases
1. Stock Rises Moderately: If the Stock price rises to $54, the investor will have a profit of $1 ($54 – $50 – $3).
2. Stock Rises Sharply: If the Stock price rises to $60, the profit is capped at $2, as the higher strike limits the gain.
3. Stock Falls: If the Stock price drops to $48, the investor will incur a maximum loss of $3.