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2018
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Bull Spread (call & put)

bull spread (call & put)

bull spreads

a bull spread option strategy is used by the option trader who is looking to profit from an expected rise in the price of the underlying security.

vertical bull spreads

the vertical bull spread is a vertical spread in which options with a lower striking price are purchased and options with a higher striking price sold. depending on whether puts or calls are used, the vertical bull spread can be established with a credit or a debit.

bull put credit spread

a vertical bull spread can be established for a credit if put options are used. the strategy is also known as the bull put spread.

bull call debit spread

a vertical bull spread can be established for a debit if call options are used. the strategy is also known as the bull call spread.

horizontal & diagonal bull spreads

the bull calendar spread and the diagonal bull spread are both time spread strategies used by option traders who believe that the price of the underlying security will remain stable in the near term but will eventually rise in the long term.

bull put spread

the bull put spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go up moderately in the near term. the bull put spread options strategy is also known as the bull put credit spread as a credit is received upon entering the trade.

bull put spread construction
buy 1 out the money put
sell 1 in the money put

bull put spreads can be implemented by selling a higher striking in-the-money put option and buying a lower striking out-of-the-money put option on the same underlying stock with the same expiration date.

limited upside profit

if the stock price closes above the higher strike price on expiration date, both options expire worthless and the bull put spread option strategy earns the maximum profit which is equal to the credit taken in when entering the position.

the formula for calculating maximum profit is given below:
  • max profit = net premium received - commissions paid
  • max profit achieved when price of underlying >= strike price of short put

limited downside risk

if the stock price drops below the lower strike price on expiration date, then the bull put spread strategy incurs a maximum loss equal to the difference between the strike prices of the two puts minus the net credit received when putting on the trade.

the formula for calculating maximum loss is given below:
  • max loss = strike price of short put - strike price of long put net premium received + commissions paid
  • max loss occurs when price of underlying

breakeven point(s)

the underlier price at which break-even is achieved for the bull put spread position can be calculated using the following formula.
  • reakeven point = strike price of short put - net premium received

bull-put-spread

bull put spread example

an options trader believes that xyz stock trading at $43 is going to rally soon and enters a bull put spread by buying a jul 40 put for $100 and writing a jul 45 put for $300. thus, the trader receives a net credit of $200 when entering the spread position.

the stock price of xyz begins to rise and closes at $46 on expiration date. both options expire worthless and the options trader keeps the entire credit of $200 as profit, which is also the maximum profit possible.

if the price of xyz had declined to $38 instead, both options expire in-the-money with the jul 40 call having an intrinsic value of $200 and the jul 45 call having an intrinsic value of $700. this means that the spread is now worth $500 at expiration. since the trader had received a credit of $200 when he entered the spread, his net loss comes to $300. this is also his maximum possible loss.

note: while we have covered the use of this strategy with reference to stock options, the bull put spread is equally applicable using etf options, index options as well as options on futures.

commissions

for ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

however, for active traders, commissions can eat up a sizable portion of their profits in the long run. if you trade options actively, it is wise to look for a low commissions broker. traders who trade large number of contracts in each trade should check out optionshouse.com as they offer a low fee of only $0.15 per contract (+$8.95 per trade).

bull call spread

the bull call spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go up moderately in the near term.

bull call spreads can be implemented by buying an at-the-money call option while simultaneously writing a higher striking out-of-the-money call option of the same underlying security and the same expiration month.

bull call spread construction
buy 1 in the money call
sell 1 out the money call

by shorting the out-of-the-money call, the options trader reduces the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price skyrockets. the bull call spread option strategy is also known as the bull call debit spread as a debit is taken upon entering the trade.

limited upside profits

maximum gain is reached for the bull call spread options strategy when the stock price move above the higher strike price of the two calls and it is equal to the difference between the strike price of the two call options minus the initial debit taken to enter the position.

the formula for calculating maximum profit is given below:
  • max profit = strike price of short call - strike price of long call - net premium paid - commissions paid
  • max profit achieved when price of underlying >= strike price of short call

limited downside risk

the bull call spread strategy will result in a loss if the stock price declines at expiration. maximum loss cannot be more than the initial debit taken to enter the spread position.

the formula for calculating maximum loss is given below:
  • max loss = net premium paid + commissions paid
  • max loss occurs when price of underlying

breakeven point(s)

the underlier price at which break-even is achieved for the bull call spread position can be calculated using the following formula.
  • breakeven point = strike price of long call + net premium paid

bull-call-spread

bull call spread example

an options trader believes that xyz stock trading at $42 is going to rally soon and enters a bull call spread by buying a jul 40 call for $300 and writing a jul 45 call for $100. the net investment required to put on the spread is a debit of $200.

the stock price of xyz begins to rise and closes at $46 on expiration date. both options expire in-the-money with the jul 40 call having an intrinsic value of $600 and the jul 45 call having an intrinsic value of $100. this means that the spread is now worth $500 at expiration. since the trader had a debit of $200 when he bought the spread, his net profit is $300.

if the price of xyz had declined to $38 instead, both options expire worthless. the trader will lose his entire investment of $200, which is also his maximum possible loss.

note: while we have covered the use of this strategy with reference to stock options, the bull call spread is equally applicable using etf options, index options as well as options on futures.

commissions

for ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

however, for active traders, commissions can eat up a sizable portion of their profits in the long run. if you trade options actively, it is wise to look for a low commissions broker. traders who trade large number of contracts in each trade should check out optionshouse.com as they offer a low fee of only $0.15 per contract (+$8.95 per trade).

a bull spread option strategy is used by the option trader who is looking to profit from an expected rise in the price of the underlying security.

vertical bull spreads

the vertical bull spread is a vertical spread in which options with a lower striking price are purchased and options with a higher striking price sold. depending on whether puts or calls are used, the vertical bull spread can be established with a credit or a debit.

bull put credit spread

a vertical bull spread can be established for a credit if put options are used. the strategy is also known as the bull put spread.

bull call debit spread

a vertical bull spread can be established for a debit if call options are used. the strategy is also known as the bull call spread.

horizontal & diagonal bull spreads

the bull calendar spread and the diagonal bull spread are both time spread strategies used by option traders who believe that the price of the underlying security will remain stable in the near term but will eventually rise in the long term.

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