However, if the asset goes higher than your short call strike point, you have the option to buy the asset at the lower strike point (long call), which is below current market value. In addition, since you are purchasing your long call option, your short call option is still active. You can then sell the contracts bought at that lower strike point (long call point) at the price of your higher strike point (short call point), minus the premium, thus creating your capped profit. A bull debit spread is a bullish strategy with limited profit potential and defined risk. The strategy consists of buying a call option and selling a call option with the same expiration date at a higher strike price. A bull call spread is exited by selling-to-close (STC) the long call option and buying-to-close (BTC) the short call option.

This has to occur in the time before expiration, in the example 30 days. However, successful option traders generally focus on probabilities and take into consideration reality. The following is the profit/loss graph at expiration for the Bull Call Spread in the example given on the previous page.

Limited Downside risk

For debit spreads, if you’ve already achieved a significant portion of the max possible profit, you might choose to close the trade early to lock in the gains. For credit spreads, if the contracts are still out-of-the-money as expiry approaches, and you believe they will remain so, you might let them expire worthless and keep the entire premium. The bull call spread payoff diagram clearly outlines the defined risk and reward of debit spreads. Because a short option is sold to reduce the trade’s cost basis, the maximum profit potential is limited to the spread width minus the debit paid. In credit spreads, you receive money upfront by selling a contract and buying another one for protection.

One way you can help offset the impact of time decay on a long option is by simultaneously selling another option against your initial position to form what is known as an options spread. There are other benefits that spreads can offer but like all options strategies there are also some trade-offs. In this article, I’d like to compare a long call with a vertical bull call spread in order to help illustrate some of those benefits and risks. 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. The worst that can happen is for the stock to be below the lower strike price at expiration. In that case, both call options expire worthless, and the loss incurred is simply the initial outlay for the position (the net debit).

Options Strategy: Create Bull Call Spread with R Language

The maximum gain is capped at expiration, should the stock price do even better than hoped and exceed the higher strike price. If the stock price is at or above the higher (short call) strike at expiration, in theory, the investor would exercise the long call component and presumably would be assigned on the short call. As a result, the stock is bought at the lower (long call strike) price and simultaneously sold at the higher (short call https://www.bigshotrading.info/blog/what-is-the-relative-strength-index-rsi-and-how-does-it-work/ strike) price. The maximum profit then is the difference between the two strike prices, less the initial outlay (the debit) paid to establish the spread. Bull call spreads have limited profit potential, but they cost less than buying only the lower strike call. Since most stock price changes are “small,” bull call spreads, in theory, have a greater chance of making a larger percentage profit than buying only the lower strike call.

That is why it may render a cost-effective choice for traders with precise predictions concerning the closing value of the base asset. We define a function that calculates the payoff from buying a call option. The function takes sT which is a range of possible values of stock price at expiration, strike price of the call option and premium of the call option as input. For example, a closing stock price at expiration of $52.75 is between the lower strike price of $52.00 and the breakeven of $52.92 and is therefore going to be a partial loss.

Volatility

As the name suggests, a bull call spread is a bullish strategy, as it profits when the underlying stock price rises. A bull call spread, which is an options strategy, is utilized by an investor when he believes a stock will exhibit a moderate increase in price. A bull spread involves purchasing an in-the-money (ITM) call option and selling an out-of-the-money (OTM) call option with a higher strike price but with the same underlying asset and expiration date. A bull call spread should only be used when the market is exhibiting an upward trend.

• This time I will be taking you through the Bull Call Spread strategy.
• In order to improve my risk-reward ratio what I can do is in addition to buying a 1160 strike call for INR 20, I can sell an INR 1200 strike call and collect a premium of INR 11.
• For example the outlook on a particular stock could be ‘moderately bullish’ or ‘moderately bearish’.
• At its core, this approach limits both potential profits and potential losses.
• It’s a way to extend the time frame for the trade if the base asset hasn’t moved as anticipated.
• If the share price moves above the strike price the holder may decide to purchase shares at that price but are under no obligation to do so.

However, if Reliance shares don’t move up within the expiry date you will incur losses. If you expect XYZ company to do well in near future then you bull call spread strategy can buy Call Options of the company. You will earn the profit if the price of the company shares closes above the Strike Price on the expiry date.