A relatively conservative trader may opt for a narrow spread where the call strike prices are not far apart, as this will have the effect of minimizing the net premium outlay while restricting gains on the trade. Consequently, the max profit is $208 ($250 – $42).
This is because at expiration, if the stock price is anywhere below $52.50, whether it be $20 or $52.49, the spread strategy will expire worthless. The offers that appear in this table are from partnerships from which Investopedia receives compensation. The primary benefit of using a bull call spread is that it costs lower than buying a call option. The higher the underlying price gets above the lower strike, the greater the gain at expiration. Bull Call Spread Risk-Reward Ratio. Combined with the initial cost of $236, the total profit from the trade is $267 – $236 = $31. Reduces the capital spent/lower breakeven price. Learn more about technical analysis charting concepts and strategies including Typical Price Moving Average, and Average Directional Movement, and Triangular Moving Average. In the example above, if Jorge only used a call option, he would need to pay a $10 premium. Under no circumstances should you trade commodities, select a broker or perform any other task connected with commodity trading without taking professional advice first. The outcome at expiration therefore depends entirely on the long lower strike call.
A bull call spread is the answer. 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. It is the underlying price at which the lower strike call option value is exactly equal to the initial cost of the entire position. At the same time, we are assigned the $50 call and lose $2 per share ($52 minus $50), or $200. By selling this call, the trader will receive $18 ($0.18 x 100 shares/contract). What if it ends up between the two strikes? It has a quantifiable, measured risk-reward profile. Call, Put, Long, Short, Bull, Bear: Terminology of Option Positions, Call Option Payoff Diagram, Formula and Logic, Long Call vs. Short Put Differences and When to Trade Which, Bull Call Spread Payoff, Break-Even and R/R, Bear Put Spread Payoff, Break-Even and R/R, Bull Put Spread Payoff, Break-Even and R/R, Bear Call Spread Payoff, Break-Even and R/R, Long Straddle Payoff, Risk and Break-Even Points, Long Strangle Payoff, Risk and Break-Even Points, Short Straddle Payoff and Break-Even Points, Short Strangle Payoff and Break-Even Points, Iron Condor Payoff, Break-Even Points and R/R, Iron Butterfly Payoff, Break-Even Points and R/R, Collar Payoff, Break-Even and Risk-Reward. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. The trader expects the stock to move above $52.92 but not higher than $55.00 in the next 30 days. A bull call spread position consists of two call options – buying a lower strike call and selling a higher strike call. Profit is limited with a bull call spread so this is not the optimal strategy if big gains are expected. This risk can be mitigated by closing the spread well before expiration, if the security is not performing as expected, in order to salvage part of the invested capital. In our example, maximum loss is $2.36 per share and maximum profit is $2.64 per share. The net effect of this transaction is that the trader has paid out $42 ($60 paid – $18 received).
The net investment required to put on the spread is a debit of $200. Even if BBUX rose to $45 by expiration in the previous example, the maximum net gain on the call spread would only be $0.50 while a trader who had only purchased the $38 calls for $1 would see them appreciate to $7. The net premium paid for the bull call spread is $42.
Breakeven = Strike price of the long call + Net Premium Outlay. A Bull Call Spread is implemented when a call is bought at a lower strike price and another call is shorted with a higher strike price. strike price of short call less strike price of long call) - (Net Premium Outlay + Commissions paid). It is a debit spread (negative cash flow when entering the position), because the price you pay for the lower strike call is typically higher than the price you get for selling the higher strike call. A bull call spread is an option strategy that involves the purchase of a call option and the simultaneous sale of another option with the same expiration date but a higher strike price. It is best used when you are already long the underlying stock and want to create an exposure similar to bull call spread (limited risk and limited upside). The calculation is given next: For example, a closing stock price at expiration of $52.75 is between the lower strike price of $52.00 and the breakeven of $52.92 and is therefore going to be a partial loss. The general formula for bull call spread break-even point is: B/E = lower strike + initial cost. A collar, commonly known as a hedge wrapper, is an options strategy implemented to protect against large losses, but it also limits large gains. It applies when the underlying ends up above or exactly at the higher strike. The latter is actually the exact other side of bull call spread (you sell the lower strike call and buy the higher strike call). Below the higher strike the short call is out of the money. It takes less than a minute. The max the trader can make from this trade is $208. Above $50 the total P/L is constant and positive, as the lower strike call continues to increase in value, but this increase is now offset by the rising value of the short upper strike call. Also see our guide to understanding the basics of reading candlestick charts and option trading strategies.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Send me a message.
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