The bull call spread reduces the cost of the call option, but it comes with a trade-off. The gains in the stock’s price are also capped, creating a limited range where the investor can make a profit. Traders will use the bull call spread if they believe an asset will moderately rise in value. Most often, during times of high volatility, they will use this strategy.

A bull call spread is established for a net debit (or net amount paid) and profits from a rising stock price. If your forecast was correct and the stock price is approaching or above strike B, you want implied volatility to decrease. That’s because it will decrease the value of the near-the-money option you sold faster than the in-the-money option you bought, thereby increasing the overall value of the spread.

Potential position created at expiration

If the stock price is midway between the strike prices, the effect can be minimal. If the stock price is closer to the lower strike price of the long call, losses generally increase at a faster rate as time passes. Alternatively, if the underlying https://www.bigshotrading.info/blog/moving-average-what-do-you-need-to-know/ stock price is closer to the higher strike price of the written call, profits generally increase at a faster rate as time passes. While the long call in a bull call spread has no risk of early assignment, the short call does have such risk.

If the stock falls below $50, both options expire worthlessly, and the trader loses the premium paid of $100 or the net cost of $1 per contract. Commodities, bonds, stocks, currencies, and other assets form the underlying holdings for call options. Call options can be used by investors to benefit from upward moves in an asset’s price. If exercised before the expiration date, these options allow the investor to buy the asset at a stated price—the strike price. The option does not require the holder to purchase the asset if they choose not to.

Bull Call Ladder Calculator

A loss of this amount is realized if the position is held to expiration and both calls expire worthless. Both calls will expire worthless if the stock price at expiration is below the strike price of the long call (lower strike). A debit spread option strategy occurs when what you pay for the long position is higher than what you receive for being short. The bull call spread and the bear put spread are the two strategies that produce such a situation.

Consider a hypothetical stock BBUX is trading at $37.50 and the option trader expects it to rally between $38 and $39 in one month’s time. Buying a call option gives you the right, but not the obligation, to buy a stock or other financial asset at the strike price before the call’s expiration. It is an efficient way to participate in a security’s potential upside if you have limited capital and want to control risk. Essentially, a bull call spread’s delta, which compares the change in the underlying asset’s price to the change in the option’s premium, is net positive.

Early Assignment Risk

The option strategy expires worthlessly, and the investor loses the net premium paid at the onset. If they exercise the option, they would have to pay more—the selected strike price—for an asset that is currently trading for less. A bullish call spread option, also known as a bull call spread option, is a trading strategy that aims to capitalize in an increase in the price of a given market or asset. The bull call spread option strategy consists of two call options that create a range that outlines a lower strike point and an upper strike point. The bullish call spread strategy helps to cap loss if the price of an asset drops, however, the strategy also caps the amount of potential gains in case of a price increase.

• If the option’s strike price is near the stock’s current market price, the premium will likely be expensive.
• I suppose at this stage you may be wondering why anyone would choose to implement a bull call spread versus buying a plain vanilla call option.
• Note, however, that whichever method is chosen, the date of the stock purchase will be one day later than the date of the stock sale.
• This technique is useful to bullish investors who believe the price will go up.

Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he bull call spread calculator advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts. How this max profit is calculated is given in detail on the Bull Call Spread profit and loss graph on the next page.