Bull Spread
Bull spread is an options strategy which is made of two call options. In bull Spread Trader buys a call option and also sells a call option of same expiry but of higher strike.
Traders use a Bull spread when they are mildly bullish on stock in near term but willing to buy for longer term. So bought call gives them option to buy stock at relatively lower price and sold call provides them a hedge. This is a “Limited Profit – Limited risk” options strategy.
Let’s Assume, Share price of ABC Corp is Rs. 54. Trader A is mildly bullish on the stock and expects it to reach up to Rs. 56 but not more than Rs. 60 in few weeks’ time. In this case, he can opt bull spread.
So In above case, Trader can buy Call option of 52/54 Strike and sell call option of 62/64 strike (buying and selling of call options are dependent to individual’s risk).
There are three possible scenarios,
In First case, if at the time of expiry underlying share price of ABC Corp. remained between the strikes of bought and sold calls. Then, Option premium of bought call will be higher than buying premium and sold call will expire worthless.
This will be the ideal scenario, because trader will have “positive payoffs” of both bought and sold calls.
In scenario two, if at the time of expiry underlying share price of ABC Corp. falls below the strikes of bought call. Then, Option premium of bought call will be lower than buying premium but sold call will expire worthless and act as hedge.
In above example, payoff of bought call will be negative but since sold call will expire worthless, payoff will be positive and will act as hedge.
In third case, if at the time of expiry underlying share price of ABC Corp. expires above the strikes of bought and sold calls. Then, Option premium of bought call will be higher than buying premium but sold call won’t expire worthless.
In this case, payoff of bought call will be positive but negative for sold call but premium of bought call will take care of incurred losses.
While trading via Bull spread, Since, its “Limited Profit – Limited risk” strategy trader will not get protection from sudden spurts or declines in share prices.
While trading options full filling margin requirements is necessary. To check what margin is required to trade put options check SAMCO’s SPAN calculator.
Quick Facts for Trading Put Options
Buying Call Options
Margin Applicable – None, however option premium is payable upfront.
Risk – Reward – Maximum Loss is restricted to the premium, whereas the maximum profit can be the strike price in case the price of the underlying asset goes to zero.
Selling Call Options
Margin Applicable – Premium is received by the seller and credited to ledger however margin is payable for holding the short position. Check the Margin requirements for writing options on the SAMCO Margin Calculator.
To begin trading put options with India’s leading discount broker SAMCO Securities, open a free trading account today.
great article