Bull Spread

Similar Strategies The following strategies are similar to the bull call spread in that they are also bullish strategies that have limited profit potential and limited risk.

A bull call spread's profit increases as the underlying security's price increases up to the strike price of the short call option. 

If early assignment of a short call does occur, stock is sold. Normally, you will use the bull call spread if you are moderately bullish on a stock or index.

Mutual Funds and Mutual Fund Investing - Fidelity Investments 

What Is a Bull Call Spread? Options provide a nearly endless array of strategies, due to the countless ways you can combine buying and selling call option(s) and put option(s) at different.

The trade is similar to a long call; it has a very good risk to reward profile. The difference is that the bull call is cheaper. You can think of it as using the short call to help offset the price of the long call.

The short call lowers the price of the trade. However, it also caps the maximum profit. This makes the bull call spread appealing for stocks that have a very bullish move. The probability is better than a long call. However, still, it is pretty low. Since the long call is the primary instrument, the trade is theta negative.

That means that the trade loses money with time. So, the longer it takes for the stock to make a bullish move, the less of a chance the trader will have of making a profit. That can be a slippery slope. When the stock does not move very bullishly, it will continue to lose value. Then, any bearish move can render the trade almost worthless.

The Ugly At expiration, three things can happen. Stock is above the short call strike — recall that the short call is the higher of the two strikes. The trader will reap the maximum profit. That is not the ugly part. However, still, if the stock is higher than the long call, it might be a good idea to close the trade early to avoid the potential of the stock moving below the short call just before expiration. Stock is between the short and long calls.

First, you want to choose an underlying stock you believe will go up. Choose an options expiration date that matches your expectation for the stock price. Many traders will initiate the bull call spread when volatility is relatively high, which may reduce the cost of the spread. These are general guidelines and not absolute rules. Eventually, you will create your own guidelines. Your first bull call trade Bull call trading Before placing a spread, you must fill out an options agreement and be approved for spreads trading.

Contact your Fidelity representative if you have questions. You decide to initiate a bull call spread. In this example, the strike prices of both the short call and long call are out of the money. This is known as a multi-leg order. For more information, contact your Fidelity representative. How to close a winning trade Before expiration, you close both legs of trade. Although some traders try to achieve maximum profit through assignment and exercise, if your profit target has been reached it may be best to close the bull call spread prior to expiration.

To avoid complications, close both legs of a losing spread before expiration, especially when you no longer believe the stock will perform as anticipated. How to close a losing trade Before expiration, close both legs of the trade. A bull call spread is the strategy of choice when the forecast is for a gradual price rise to the strike price of the short call.

Impact of stock price change A bull call spread rises in price as the stock price rises and declines as the stock price falls. Also, because a bull call spread consists of one long call and one short call, the net delta changes very little as the stock price changes and time to expiration is unchanged.

Impact of change in volatility Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices.

As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant. Since a bull call spread consists of one long call and one short call, the price of a bull call spread changes very little when volatility changes. This is known as time erosion, or time decay. Since a bull call spread consists of one long call and one short call, the sensitivity to time erosion depends on the relationship of the stock price to the strike prices of the spread.

This happens because the long call is closest to the money and decreases in value faster than the short call. This happens because the short call is now closer to the money and decreases in value faster than the long call. If the stock price is half-way between the strike prices, then time erosion has little effect on the price of a bull call spread, because both the long call and the short call decay at approximately the same rate.

 

Limited Downside risk 

In The Money A bull call spread is an option strategy Investopedia explains: A bull put spread is a variation of Trading Vertical Bull and Bear Credit Spreads This trading strategy is an excellent limited-risk.

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 . In options trading, a bull spread is a bullish, vertical spread options strategy that is designed to profit from a moderate rise in the price of the underlying security. Because of put-call parity, a bull spread can be constructed using either put options or call options. 

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The Strategy

A bull call spread is a type of vertical spread. It contains two calls with the same expiration but different strikes. The strike price of the short call is higher than the strike of the long call, which means this strategy will always require an initial outlay (debit). Options traders looking to take advantage of a rising stock price while managing risk may want to consider a spread strategy: the bull call spread. This strategy involves buying one call option while simultaneously selling another.

This strategy is the combination of a bull call spread and a bull put spread. A key part of the strategy is to initiate the position at even money, so the cost of the call spread should be offset by the proceeds from the put spread. Since a bull call spread consists of one long call and one short call, the price of a bull call spread changes very little when volatility changes. In the language of options, this is a “near-zero vega.”.

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