Bull call spread is a very interesting and clever strategy. Even though it can be very beneficial if the conditions are just right, it requires serious knowledge of the market trends and a lot of research in order to be executed correctly. If everything works out in the traders favor, though (which is often the case if he does the proper research and if there arent any unforeseen market conditions), bull call spread can lead to serious profits with low risks. However, if the conditions are against the trader, the losses can also be serious (if the trader isnt careful and especially if he decides to trade in bulk) so this strategy should be approached with caution, especially by new and, moreover – aggressive traders.
What is a Bull Call Spread?
Bull call spread is a relatively simple strategy, but it can lead to some serious ramifications. The strategy is a bit like a game of chess – there are a few moves the trader makes and they can result in his profit or losses. The first move is the purchase of the call options for a certain underlying asset. Of course, this is only a good idea if we expect that the price of the asset will increase by the time we reach the expiration date. Otherwise its a complete loss of the fee. The second move the trader makes is selling an equal number of calls for the same underlying asset and using the same expiration date, but at a higher strike price. The potential profit a trader can make is the difference between the two strike prices. Bull call spread is a vertical spread in most cases.
Why would you use Bull Call Spread?
The strategy is usually used in order to ensure making a profit based on an asset youre positive will rise in price. You are buying a number of call options for that asset and selling the same number for a higher strike price. If the strike price of the call options youre selling is still lower than the current price market, you will make your profit and that profit will be the difference between the two strike prices. Lets use an example in order to better visualize the whole strategy.
Lets say the current price JKL stocks go for is USD 21. You purchase a call option with a strike price USD 23. Then you sell a call option for the same underlying asset for USD 30 with the same expiration date. Now, in our example the stock prices jump to USD 40 before the expiration date and the buyer of your call option wants to purchase the stocks at the strike price (USD 30). This is where the call option you purchased for USD 23 comes in handy, because you can purchase the stocks for USD 23 instead of the current market price of USD 40.
This way your profit is USD 7 per share sold. In theory, you can make enormous profits this way, but you really need to know the market and upcoming trends. If youre good at technical analysis and you know your way around the charts and can easily spot patterns, then this is one of the ways you can make profits with very small risks. This is a very good strategy for experienced traders and technical analysts who can easily deduce where the prices are headed. We wouldnt recommend trying this strategy if youre not all that familiar with the market conditions and the different price stances of the underlying asset.
Bull call spread is a good strategy for analytical and experienced traders and it offers a potential for short and mid-term profits with small risks. The potential for the profit depends on the difference between the used strike prices used in making the deals, as well as the quantity of stocks purchased in actuality. If youre experienced, then by all means this is a good strategy for you. If you know your way around the market and can easily decipher a chart, stop trends and make good predictions based on this information, then you will be able to make considerable profits in no time, with little risk involved.