Bull Call Spread
Bull Call Spread – A limited risk and limited profit trade that can lower the cost or risk to enter a bullish trade while still making a large % gain with the ability to profit on time decay.
A bull call spread is the best strategy if you have a really positive feeling about a stock. It may have a low reward but the risk is equally low so this is a good way to grow your investment slowly.
One easy way of creating a bull call spread is by using call options at or near the current price of the stock. So, supposing the stock is trading at $53.70, you can then buy a 50 call and sell another 60 call.
For example, if ABC stock is trading at $53.70, you can buy one 50 call and sell another 60 call. As you sell the 60 call, you lower your risk. At the same time, you should understand that this also limits your upside potential. You will have to pay $5.90 for the 50 call and then sell the 60 call for $1. Here, you will have to pay $490 ([$5.90 x 100] – [$1 x 100]). Take a look at the following table:
|ABC trading @ $53.70|
|Buy 1 ABC JUL 50 Call @ $5.90||$590.00|
|Sell 1 ABC JUL 60 Call @ $1.00||($100.00)|
|Cost of Trade||$490.00|
Your potential maximum profit would be $510 which is actually the difference between the strike price and the amount of the put. Even if the stocks reach 100, the most that you can make is only $510 because even though your profiting on the $50 call you own, the $60 call you sold is going to limit your gains. The trade off of was in the lower cost to enter this trade. A $510 gain on a $490 investment is still well over a 100% gain on whatever number of bull call spreads you entered.
Aside from the bull call spread, you might also want to check out the bull put spread and the bear put spread. They are similar with the bull call spread and you can easily use them to meet your investment objectives.
|Bullish Strategies||Neutral Strategies||Bearish Strategies|