The underlier price at which break-even is achieved for the bull call spread position can be calculated using the following formula. Because you’re both buying and selling a call, the potential bull call spread strategy effect of a decrease in implied volatility will be somewhat neutralized. Spread trading is considered an intermediate options strategy and requires options approval level 2 at Charles Schwab.

• So, even though the position has around 45 days to expiration, the long call spread is worth near its maximum potential value.
• Traders will use the bull call spread if they believe an asset will moderately rise in value.
• Generally speaking in a bull call spread there is always a ‘net debit’, hence the bull call spread is also called referred to as a ‘debit bull spread’.
• You can then sell the contracts bought at that lower strike point (long call point) at the price of your higher strike point (short call point), minus the premium, thus creating your capped profit.
• The main reason why you would use this spread is to try and profit from an asset increasing in price.

The trader buys a call option with an exercise price of $21,000 and sells another call with an exercise price of $23,000. The $21,000 call costs $500 (premium), and the $23,000 call can be sold for a premium of $200. The total cost of setting up this spread is therefore $300, which is also the max possible loss. The objective of adopting the strategy is to ascertain the potential value of investment while limiting the losses and risks.

Bull call spread example

A long call spread gives you the right to buy stock at strike price A and obligates you to sell the stock at strike price B if assigned. See our Pricing page for detailed pricing of all security types offered at Firstrade. Since the strategy involves being long one call and short another with the same expiration, the effects https://www.bigshotrading.info/blog/buying-and-selling-volumes/ of volatility shifts on the two contracts may offset each other to a large degree. I suppose this chapter has laid a foundation for understanding basic ‘spreads’. Going forward I will assume you are familiar with what a moderately bullish/bearish move would mean, hence I would probably start directly with the strategy notes.

However there has been a sudden decline in the stock price, so much so that the stock price is now at the 2nd standard deviation. There is no fundamental reason backing the stock price decline, hence there is a good chance that the stock price could revert to mean. This makes you bullish on the stock, but the fact that it there is a chance that it could spend more time near the 2nd SD before reverting to mean caps your bullish outlook on the stock. A vertical call spread consists of purchasing of a call and concurrent sale of another call with the same maturity date. Vertical spreads display versatility in accommodating both bullish and bearish market expectations. In essence, bullish spreads are tailored for an upward market forecast.

When to Use a Bull Call Spread?

If the stock price is between 145 and 155 at expiration, only the long call expires in-the-money, resulting in a position of +100 shares for the call spread buyer. Now that you have the premium, you can calculate your max profit and losses. The max loss is calculated by simply multiplying the (net premium spent). Review the Characteristics and Risks of Standardized Options brochure (PDF) before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.

The short call’s main purpose is to help pay for the long call’s upfront cost. Call debit spreads benefit when the underlying security’s price increases. The time value of the long option contract decreases exponentially every day. Ideally, a large move up in the underlying stock price occurs quickly, and an investor can capitalize on all the remaining extrinsic time value by exiting the position. Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices.

How Does Buy One Call, Sell One Call Work?

Even if the stock price were to skyrocket to $500, Jorge would only be able to realize a gain of $27. Additionally, Jorge sells an out-of-the-money call option for a premium of $2. It contains two calls with the same expiration but different strikes. The strike price of the short call is higher than the strike of the long call, which means this strategy will always require an initial outlay (debit).

The trader will realize maximum profit on the trade if the underlying closes above the short strike on expiration. A bull call spread is constructed by buying a call option with a lower strike price (K), and selling another call option with a higher strike price. This web site discusses exchange-traded options issued by The Options Clearing Corporation.

The passage of time hurts the position, though not as much as it does a plain long call position. Since the strategy involves being long one call and short another with the same expiration, the effects of time decay on the two contracts may offset each other to a large degree. So the point is that, the risk reward changes based on the strikes that you choose.