Strategy in brief: Buy call option with a lower strike and sell another call with a higher strike producing a net debit
When to use this strategy: you expect the stock to go up or at least to be a bit more likely to rise than to fall.
Comments:
· Both options should have the same expiration date.
· This is a good position if you want to be in the stock but are unsure of bullish expectations.
· This is the most popular bullish strategy, along with the “Bull Put Spread”.
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Figure: Bull Call Spread Strategy Example
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Profit: potential is limited, reaching its maximum if the stock ends at or above the higher strike at expiration.
Loss: limited. Loss reaches its maximum if the stock at expiration is at or below the lower strike. This maximum is equal to the initial debit.
Risk: Limited.
Reward: Limited.
Time value decay: If the stock is midway between the strikes, there is no time effect. When the stock price is close to higher strike, profits increase at the fastest rate. When the stock price is close to lower strike, losses increase at a maximum rate.
Research Findings and Trading Tips:
1. Many beginning option traders prefer bull put credit spreads over bull ñall debit spreads. They prefer to get money than to pay. However, both kinds have almost equivalent parameters.
2. My stock dropped! What should I do? If you are facing unrealized losses on a collapsed stock, you can get better chances to save your money using call spreads.
