Understanding the Bull Call Spread

A bull call spread is a involves engaging in two sides of a call option simultaneously. The individual involved in the process has one call option to buy at a certain strike price and one call option to sell at a separate strike price. The investor may find it favorable to do both at the same point in time to either profit or at least cover a loss. A bull call spread can take multiple forms, but it is most often a vertical spread. A vertical spread occurs whenever a trader is exchanging calling two options with the same expiration date but selling one of the options and buying the other.

Bull Call Spread Example

Bull call spreads are complicated; to understand the process, consider an example. A trader holds a single security with a current price of $5 a share. The investor has one option to buy when the security hits $8 and one option to sell when the security hits $10. If the security rises to $13 a share, it is likely the individual who holds the $8 option will call in the option. This means the investor must provide a certain number of shares, such as 100, to the individual calling the option at $8 a share. Instead of going and purchasing the security for the current cost of $13, the investor would be able to exercise his $5 call, purchasing those 100 shares for much cheaper. In doing so simultaneously, the investor would be able to profit at the price of $3 per share, or $300 on the trade minus trading fees. 

Finding Profitable Bull Call Spreads

The most profitable spreads will be found on very unpredictable securities. It is unlikely to find options on a security with very wide strike prices. This gap is essential, though, to turn the profit mentioned in the above example. If the difference in the two strike prices were $0, no profit would be made, and the investor would actually lose money through transaction fees. Therefore, a security is only ripe for this type of scenario if buy and sell options are being offered at variable prices.

Negating Loss through Bull Call Spreads

The main advantage of a bull call spread appears anytime an investor can find a buy option that is lower than a sell option. This means the investor will always have the ability to locate the security for less than the price he must sell it for to his purchaser. The difference in the two prices will create a profit no matter how high the price of the security climbs. The key is finding this scenario with two options that have the same expiration date. If the expiration dates vary, the investor will not be able to pull off the simultaneous vertical spread. As a result, potential profit can be greatly decreased if not totally lost. Further, the longer the gap between the two transactions, the riskier the transaction becomes. Calling the buy option early in anticipation of needing the shares for the sell side only works if the price of the security continues to rise.

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