When to use:
A bull call spread is constructed using two call options.And
it means to by buying a call option with a low strike price, and selling
another call option with a higher.The bull call is one of the Bullish
Strategies . It consist of two call in same underlying stock .
Buy 1 in the money call option
Sell 1 out the money call
option.
Bull Call Spread option trading strategy is used by a trader
when he thinks the market is bullish in nature and expects the underlying stock
to give decent returns in the near future. When trader sell(write) a call, He
will receive premium which results in reducing the cost for buying an ITM Call Option.
However, the profits are also minimized. This strategy is also called as ‘Bull
Call Debit Spread’.
An options strategy that involves 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. A bull call spread is used
when a moderate rise in the price of the underlying asset is expected.Often the call with the lower exercise price will be at-the-money
while the call with the higher exercise price is out-of-the-money.
Both calls must have the same underlying security and expiration month. If the
bull call spread is done so that both the sold and bought calls expire on the
same day, it is a vertical debit call spread.
A strategy with limited risk and predictable reward, used
when a stock's price is anticipated to rise.
Risk:
The maximum loss is very limited. The worst that can happen
is for the stock to be below the lower strike price at expiration. In
that case, both call options expire worthless, and the loss incurred is simply
the initial outlay for the position.
Profit :
The maximum profit is limited to the difference between the
strike prices, less the debit paid to put on the position The maximum gain is
also limited. If the stock price is at or above the higher (short call) strike
at expiration, the investor would exercise the long call component and
presumably would be assigned on the short call. As a result, the stock is
bought at the lower (long call strike) price and simultaneously sold at the
higher (short call strike) price. The maximum profit then is the difference
between the two strikes prices, less the initial outlay (the debit) paid to
establish the spread.
Example:
Suppose
that the NIFTY is trading around 8100 level. And if you want to enters into
Bull-Call-Spread strategy. You brought one 8100 ITM Call Option for a premium
of Rs. 165, and sells one 8300 OTM Call Option for Rs. 55.The lot size of NIFTY
is 25.Hence the net investment will be only Rs. 5500
1.Buy
8100 call option 165*25=4125
2.
Short 8450 call option 55*25=1375
Case 1: At expiry if the NIFTY dips down to 8000 level,
the maximum loss will be only Rs. 5500.i,e our total investment of both the
calls.
Case 2: At expiry if the NIFTY closes at 8200 level, net
profit will be Rs. 6000.
8100
call at expiry day is Rs 100.
8300
call at expiry day is 0 which means we can get the total short amount.
So
total loss is 100*25=2500
Short
call option 55*25=1375
3875
Total Loss is 5500-3875=Rs 1625
Case 3: At expiry if the spot NIFTY closes at 8400 level,
the intrinsic value of the 8100 ITM call will be Rs.300 and that of 8300 OTM
call will be Rs. 100. At expiry, the cash settlement will be done with a credit
of Rs.
8100 call at expiry day is Rs 300
8300 call at expiry day is Rs 100
Total Profit:
Profit in 8100 call =300-165=135*25=3375
Loss in 8300 call=100-55=45*25=1125
Total
Profit=3375-1125=Rs 2250
