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Bull Call Spread Option Strategy

Bull Call Spread Option Strategy

What is Bull Call Spread Option Strategy?

  • Bull Call Spread is a net debit strategy with limited risk to limited reward. Bull Call Spread is a moderate bullish strategy that is executed by buying a call and selling a higher strike call to fund it and reduce the execution cost, it should not be executed when we have extreme bullish biases as profit is capped on the upside.

When to Execute?

  • Bull Call spread is executed when we have bullish outlook in Stock/ Index in near term. Instead of buying naked calls with higher outflow, one sells higher strike calls to partially fund the outflow resulting in hedged strategy. Identifying clear uptrend is essential for the strategy, specifically can be implemented on breakout which helps to get the momentum, on the other hand risk is limited and will not hurt much if breakout fails to materialise. Ideal scenario to execute bull call spread is when we are expecting gradual rise in price till the sold strike price, then we can earn premium in buy call and we can have theta benefit in sold call option too.

What is the Trade?

  • Buy one lot (At-The-Money) ATM Call and Sell one lot Out-of-Money (OTM) CE. Both the Call should be of the same underlying and expiration. Breakeven for Bull Call Spread. Breakeven point = Buy Call Strike Price + net premium paid.

What will be maximum profit?

  • Maximum reward is limited to difference in strike less net outflow. Maximum Profit arises if the stock closes at or above the higher strike.

What will be your maximum loss?

  • Maximum risk is limited by the difference in cost of long and short calls.

What are the advantages?

  • Helps to participate in a bullish stock with relatively low cost. Reduced risk, cost, and breakeven point for a medium- to long-term bullish trade as compared to buying a call alone. Capped downside (although still 100% of the outlay).

What are the disadvantages?

  • Capped profit if the stock closes above short Call. Identifying clear areas of resistance and selection of strike becomes very important.

Example for Bull Call Spread

  • Nifty future price is 15500. A Bull Call Spread can be devised by adding one lot of 15500 CE At-the-Money (ATM) @200 and selling one lot of 15800 CE (ATM) @ 100. Net Premium Paid or Received = Rs. (-100). Maximum profit above 15800 i.e., 300-100 =200. i.e., difference between 15800-15500 = 300 – 100 (net premium paid). Maximum Loss = -100 (i.e., net premium paid)