Bull Call Spread Options Trading Strategy Explained
Bull Call Spread Options Strategy
Strategy Level: Beginners
Instruments Traded: Call
Number of Positions: 2
Market View: Bullish
Risk Profile: Limited
Reward Profile: Limited
The Bull Call Spread (or Bull Call Debit Spread) is a trading strategy designed for investors who hold a moderately bullish view of the market and anticipate a mild increase in the price of the underlying asset. This strategy involves both buying and selling Call Options, resulting in a limited risk-reward scenario.
Bull Call Spread Strategy: Buying ITM Call Options and Selling OTM Call Options
The approach known as the Bull Call Spread Strategy involves the act of purchasing In-The-Money (ITM) Call Options while concurrently engaging in the sale of Out-of-The-Money (OTM) Call Options.
Imagine this scenario: you hold an optimistic perspective on NIFTY, which currently rests at a valuation of 15,000. In this setting, you might decide to venture into an investment by acquiring an In-The-Money (ITM) NIFTY call option at a 14,800 strike price. Concurrently, you also have the choice to engage in the sale of an Out-of-The-Money (OTM) NIFTY call option with a strike price of 15,200, yielding a premium of 250. Consequently, your cumulative premium outlay would stand at Rs. 200, aligning seamlessly with the scope of your potential maximum loss.
When to Use the Bull Call Spread Strategy
Opting for the Bull Call Spread Strategy becomes particularly prudent in instances where you anticipate an imminent upswing in the market. This approach is especially fitting when your prediction entails a market rise, yet you lack a definitive conviction regarding the magnitude of the ascent.
Bull Call Spread of NIFTY – An Example
- Current Nifty: 15,000
- Lot Size: 75
- Call Option Strike Price: Rs. 14,800
- Premium Paid: Rs. 250
- Short Call Option Strike Price: 15,200
- Premium Received: Rs. 50
- Net Premium Paid: Rs. 200
- Break-Even Point: 15,000 (Strike price of purchased call + net premium)
Key Functions of the Bull Call Spread Strategy
- Reduced Break-Even Point: The Bull Call Spread lowers the break-even point compared to only purchasing the Call Option. Instead of 15,050, it becomes 15,000.
- Reduced Net Premium: The strategy also reduces the net premium. While purchasing the Call Option alone would have a premium of Rs. 250, the Bull Call Spread lowers it to Rs. 200.
- Reduced Loss: The maximum loss is decreased from Rs. 250 (for only purchasing the Call Option) to Rs. 200.
Bull Call Spread Strategy Payoff Chart
| Nifty on Expiry | Long Call Option (SP-BEP) | Short Call Option (BEP-SP) | Net Payoff (Rs) |
|---|---|---|---|
| 14,800 | -22,500 | 7,500 | -15,000 |
| 14,900 | -22,500 | 7,500 | -15,000 |
| 15,000 | -22,500 | 7,500 | -15,000 |
| 15,100 | -22,500 | 7,500 | -15,000 |
| 15,200 | -2,500 | 7,500 | 5,000 |
| 15,300 | 17,500 | 7,500 | 25,000 |
| 15,400 | 37,500 | -2,500 | 35,000 |
Market View – Bullish
The Bull Call Spread Strategy is suitable when you expect a moderate increase in the price of the underlying asset.
Bull Call Spread: Risk Profile
The risk profile of the Bull Call Spread is limited. The trade will result in a loss if the price of the underlying drops at expiration, with the maximum loss being the net premium paid.
Max Loss = Net Premium Paid
The maximum loss occurs when the call strike price is equal to or less than the price of the underlying.
Bull Call Spread: Reward Profile
The reward profile of the Bull Call Spread is limited. The maximum profit is achieved when the price of the underlying asset exceeds the strike prices of both Call Options. The profit is limited by the difference in strike prices between the two Calls minus the net premium.
Max Profit = Strike Price 1 – Strike Price 2 – Net Premium Paid
Bull Call Spread Scenario with Maximum Profit
The Bull Call Spread results in maximum profit when both options are exercised.
Bull Call Spread Scenario with Maximum Loss
The strategy leads to maximum loss when both options remain unexercised.
Advantages of the Bull Call Spread Strategy
This strategy offers cost and risk reduction for your investment, as it avoids an immediate purchase of a Call Option.
Disadvantage of the Bull Call Spread Strategy
The profit potential is restricted due to the limited nature of the strategy.
How to Exit the Bull Call Spread Strategy
To exit the Bull Call Spread, you need to sell the call options you initially bought and buy back the call options that you sold.
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