Bull Call Spread option trading strategy is used by a trader who is bullish in nature and expects the underlying asset to give decent returns in the near future. This strategy includes buying of an ‘In The Money’ Call Option and selling of ‘Deep Out Of the Money’ Call Option of the same underlying asset and the same expiration date.
This strategy is similar to Short Straddle; the only difference is of the strike prices at which the positions are built. Short Strangle involves selling of one OTM Call Option and selling of one OTM Put Option, of the same expiry date and same underlying asset. Here the probability of making profits is more as there is a spread between the two strike prices, and if ..
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
BULL CALL SPREAD Vs SHORT STRANGLE - When & How to use ?
BULL CALL SPREAD
SHORT STRANGLE
Market View
Bullish
Neutral
When to use?
This strategy is used when an investor is Bullish in the market but expect the underlying to gain mildly in near future.
This strategy is perfect in a neutral market scenario when the underlying is expected to be less volatile.
Action
Buy ITM Call Option, Sell OTM Call Option
Sell OTM Call, Sell OTM Put
Breakeven Point
Strike price of purchased call + net premium paid
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
BULL CALL SPREAD Vs SHORT STRANGLE - Risk & Reward
BULL CALL SPREAD
SHORT STRANGLE
Maximum Profit Scenario
(Strike Price of Call 1 - Strike Price of Call 2) - Net Premium Paid
Maximum Profit = Net Premium Received
Maximum Loss Scenario
Net Premium Paid
Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received
Risk
Limited
Unlimited
Reward
Limited
Limited
BULL CALL SPREAD Vs SHORT STRANGLE - Strategy Pros & Cons
BULL CALL SPREAD
SHORT STRANGLE
Similar Strategies
Collar
Short Straddle, Long Strangle
Disadvantage
• Limited profit potential to the higher strike call sold if the underlying stock price rises. • Maximum profit only if stock rises to the higher of 2 strike prices selected.
• Unlimited loss is associated with this strategy, not recommended for beginners. • Limited reward amount.
Advantages
• Allows you to reduce risk and cost of your investment. • When placing the spread, exit strategy is pre-determined in advance. • Risk is limited to the net premium paid.
• Higher chance of profitability due to selling of OTM options. • Advantage from double time decay and a contraction in volatility. • Traders can book profit when underlying asset stays within a tight trading range.
