Bull Put Spread: An Excellent Way to Profit From Time Decay

bull call spread strategy

In the first 30 days of the trade, the stock price stagnates around the breakeven price of the long call spread. However, with around 45 days to expiration, the stock jumps 30% to $80 after an earnings announcement. Alright, you’ve seen long call spread examples that break even and realize the maximum loss. In the final example, we’ll investigate a long call spread trade that winds up with its maximum profit potential. However, at expiration, the stock price was only slightly above the long call spread’s breakeven price.

Profit from a gain in the underlying stock’s price without the up-front capital outlay and downside risk of outright stock ownership. Here are a bunch of graphs that will help you identify the best possible strikes based on time to expiry. Given all this there is a high probability that the stock could stage a relief rally.

As Time Goes By

When you sell the call option at the higher strike point, this creates the premium which will help offset the call price you paid for the long call. Since the long call is in-the-money at expiration, the trader would end up with +100 shares of stock if they did not sell the long call before expiration. Upon selling the long call portion of a bull call spread, it’s wise to buy back the short call. Otherwise, the trader will expose themselves to unlimited loss potential. If the stock price is in-between the strike prices at expiration, such as $149.81, the long 145 call will have value while the 155 call will expire worthless. At $149.81, the 145 call will be worth $4.81 ($149.81 Stock Price – $145 Strike Price) and the 155 call will be worth $0, resulting in no profit or loss on the trade.

bull call spread strategy

Here is something you should know, wider the spread, higher is the amount of money you can potentially make, but as a trade off bull call spread strategy the breakeven also increases. After we initiate the trade, the market can move in any direction and expiry at any level.

Bull Call Spread Strategy Characteristics

You may switch the view using the links at the top of the screener results table. TheMain Viewshows the Volume and Open Interest for each option, while the Dividend & Earnings View can be used to highlight strategies with upcoming dividends and earnings. The Filter view shows you the data contained in the field you’ve added to the screener. For example, if you are of the view that Nifty will rise moderately in near future then you can Buy NIFTY Call Option at ITM and Sell NIFTY 50 Call Option at OTM. You will earn massively when both of your Options are exercised and incur huge losses when both Options are not exercised. A https://www.bigshotrading.info/ involves Buy ITM Call Option + Sell OTM Call Option. For example, if you are of the view that NIFTY will rise moderately in near future then you can Buy NIFTY Call Option at ITM and Sell Nifty Call Option at OTM.

  • The term “long” refers to the fact that this strategy is “long the market,” which is another way of saying that it profits from rising prices.
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  • Now that you have the premium, you can calculate your max profit and losses.
  • First, it will increase the value of the option you bought faster than the out-of-the-money option you sold, thereby increasing the overall value of the spread.
  • For the long call, the options trader pays a premium which is the maximum loss from the long call.

Going by the above example, it is clear that even though the trader’s view was correct, he still had to book loss in 2 out of the three cases. Only when the stock rises much above the anticipated level, a trader could book some profit.

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