Bull Call Spread
It's important to understand first that a buy or long call option, by itself - is bullish and a short call by itself - is bearish.
When you own a call option, you are bullish because the contract gives the holder the right to buy the underlying stock at the strike price. When a trader is short a call contract, he is bearish. That is because the investor is obligated to deliver shares of the stock to the call holder when the option is exercised. This usually results in a loss for the seller, as the market will be higher to get the stock and it's being sold at a lower strike price.
A spread takes those 2 positions and has them work together. Although, they do not have to get exercised together. A bull call spread means the contracts are set up in a way that makes strategy profitable only if the market goes up. This also means that the contract bought cost more than the contract sold. Bullish call spreads are also known as call debit spreads.
Example:
Buy 1 SDH Nov 80 Call for $500
Short 1 SDH Nov 90 Call for $200
This is an example of a debit bull call spread. Debit because the investor has lost $300 on the premiums bought and sold. The buy option cost $500 and the short took in $200. Since the trader is very aware of this initial loss, he wants the market to rise so the options have a chance to grow in value. If this happens, the person take advantage of trading opportunities on the more valuable contracts or he can look to exercise both contracts and make a positive spread on the strike prices.
Exercising bull call spreads
Spreads are basically covered options. One option covers the other - but not always for a profit. When it's a bullish call spread, it will be profitable. The buy or long call can be exercised at 80. This means the trader can own the stock itself at $80. If the short call is exercised (called away) at 90, he has a 10 point positive gain on the strike price. The maximum gain for this strategy is 10 points minus the net loss debit of 3 points. So, on one contract each, the maximum profit on this call spread is $700.
The point being, bullish call spreads are only profitable when the market goes up. Otherwise these options would fade out in a declining market and the investor would lose the $300.
Expiring bullish spreads
The worst case scenario with bullish call strategies are the options expiring. It is to the investors advantage the market rises soon after the contracts have been established. That is always the big picture with options. They come and go quick.
Happy Trading
More Spreads
Related Tags: option trading, bullish spread, call option spread, spread trading, bull call spread investing
Nick Hunter is the President of American Investment Training. Their website http://www.aitraining.com offers investors and brokers with education courses and investment information.
Your Article Search Directory : Find in ArticlesRecent articles in this category:
- Free Online Stock Market Software
It can be quite tough to find good stock market software there are just so many options out there to - Few Essential Commodities That Are Traded
Segregating commodities into different types makes it easier for traders and investors to compare pr - Ecn Trading
First of all, Market Maker Broker.Market maker broker is a company authorized to create and maintain - Stock Market Wisdom-learning To Trade Like The Legends, Part 7
Top traders and investors know the most money will be made by following the main trend. Jumping in a - Stock Chart Analysis And Understanding Trend Lines
Nearly all practiced equity market participants understand trends in the stock market offer the very - Three Tips For Picking Out The Best Value Investing Software
Value investing software can turn a first time clueless trader into a success in the stock market wi - Market News Giving Shape To Investment Goals
Do you think market news can help you take the right trading decisions? It is an obvious 'Yes'. If y - Stock Market Investing Without Emotion
Investing in the stock market is so tricky, and an emotionally driven decision to most people, that - How To Spot And Select The Best Automated Trading Stocks Program
Easily the greatest deterrents which keep potential traders out of the stock market is the risk asso - Why Are Millions Of Traders Using Online Stock Trading Programs?
Online stock trading programs are those which deliver profitable and winning stock picks right to yo
Most viewed articles in this category:
- Trading Secrets of a Successful Share Trader
The first and most important thing a trader must have is a "TRADING PLAN"This is a "Written PLAN" wh - Beat the Market
Beat the Market! Can it really be done? Consistently?As unlikely as it may seem, hedge fund manager - How To Find Potential Profitable Stocks
There first thing is knowing where to look. It is quite amazing sometimes where a tip or information - Commodities Trading Online
With the advancement of the internet, commodities trading online is now made possible. Commodities t - Kennametal be such a great Buy?
From many of my previous articles I have focused more on companies I would consider buys in the shor - Minority Shareholder Squeeze Out
For those that have been a victim of a minority shareholder squeeze out, the experience can be a nig - Beating the Dow with Bonds!
Beating the Dow with Bonds, is 1/3 of an extremely successful asset allocation strategy outlined i - Beta - Analyzing The Risk Profile Of Stocks
Who would not like to have an exact risk positioning outlined in front before taking any decision? W - 4 Main Risks Involved in Futures Trading
There's no doubt that futures trading is inherently a risky business. Anyone who tells you it is 100 - Penny Stock Picks: The Promises And Pitfalls
When trading any security you really need to do your homework. If you do not, and the price per shar