 Bull Call Spread Option Strategy
When the market is volatile and you are moderately
bullish on it, you can minimize your cash invested in a
position, and minimize your risk while still reaping high
profit potential by utilizing a Bull Call Spread. This
strategy involves buying a call option at one strike price
and selling a call on the same asset at a higher strike
price. Usually both options will have the same expiration
date.
Your cost in establishing this position is less than it
would be in just buying a call option, because you are
also selling a call at a higher strike price. So you are
taking in some money from that sale which reduces your
cost outlay and raises your ultimate return-on-investment.
With this strategy, your potential loss is limited to the
premium you paid for the calls less commissions and the
premium you collected for the calls you sold. Unlike the
outright purchase of a call option, your potential profits
are limited to the difference between the strike prices
multiplied by 100 times the point value of the contract,
less the cost of establishing the position. An option
calculator such as Option-Aid performs these
calculations for you instantaneously.
When we initiate a Bull Call Spread, the call that we
purchase is normally at-the-money. We try to allow
enough time for the market to make the anticipated move. The
call we sell has the same expiration date, with a higher
strike price (at a price point that we feel the asset can
easily move to within the time period until expiration, yet
not too high because it lowers the premium we are
collecting to lower our cost basis).
It is important to discuss an additional benefit of doing a
Bull Call Spread instead of buying just a call option when
the issue you are considering has high volatility. If you
purchase a call option on an asset that has high volatility,
the asset price could go up, as you expected, yet at the
same time, the option price could drop if the implied
volatility of the asset declines significantly during that
time. So although you were right about the directional
movement of the asset, you would have lost money in a
straight call option play. A Bull Call Spread could
ameliorate that risk, because it is the spread between the
call option prices that determines your profit. The call that
you sold would also go down in value as volatility
declined, but the spread between the call prices would
increase as the price of the underlying asset increased.
That would give you a profit instead of a loss.
It is also important to cover risks and caveats of this
strategy.
The risk of this position is limited and known as
described above. Remember that the commission you
pay for this position will be higher than the commission
for a straight option play, because you are initiating two
related option transactions.
When you initiate a Bull Call Spread rather than outright
purchase of a call, you are limiting your upside potential.
If the asset price rockets skyward, then you aren't able to
fully participate in that gain because the higher strike
price call that you sold will probably be exercised,
limiting your gain.
The major benefits of this strategy occur when volatility is
high, making the purchase of calls expensive and
increasing the risk of a drop in volatility.
It is important to analyze your expectations for the
underlying asset and for the market before selecting your
strategy.
When you are analyzing potential option positions, it
helps to have a computer program like Option-Aid that
swiftly calculates volatility impacts, probabilities,
statistics, and other parameters of interest. These
programs can pay for themselves with the first trade that
they help you with.
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