Bull Call Spread

Amongst all the spread strategies, the bull call spread is one the most popular one. The strategy comes handy when you have a moderately bullish view on the stock/index.

The bull call spread is a two leg spread strategy traditionally involving ATM and OTM options. However you can create the bull call spread using other strikes as well.

To implement the bull call spread –

We need to buy 1 ATM call option (leg 1)

We need to sell 1 OTM call option (leg 2)

When you do this ensure –

All strikes belong to the same underlying

Belong to the same expiry series

Each leg involves the same number of options

For example –

Date – 20th April 2019

Outlook – Moderately bullish (expect the market to go higher but the expiry around the corner could limit the upside)

Nifty Spot – 11752.80

BUY ATM – 11750 CE, premium – Rs.70/-

SELL OTM – 11850 CE, premium – Rs. 30/-

Bull Call Spread, trade set up –

Buy 11750 CE by paying 70 towards the premium. Since money is going out of my account this is a debit transaction

Sell 11850 CE and receive 30 as premium. Since I receive money, this is a credit transaction

The net cash flow is the difference between the debit and credit i.e 70 – 30 = 40.

Generally speaking in a bull call spread there is always a ‘net debit’, hence the bull call spread is also called referred to as a ‘debit bull spread’.

We’ll be discussing 4 cases of expiry, to get a sense of what would happen to the bull call spread for different levels of expiry.

Case 1 – Market expires at 11650 (below the lower strike price i.e ATM option)

In case of 11750 CE, the intrinsic value would be = 0

Since the 117500 (ATM) call option has 0 intrinsic value we would lose the entire premium paid i.e Rs.70/-

The 7900 CE option also has 0 intrinsic value, but since we have sold/written this option we get to retain the premium of Rs.30.

So our net payoff from this would be –

-70 + 30

= 40

Do note, this is also the net debit of the overall strategy.

Case 2 – Market expires at 11750 (at the lower strike price i.e the ATM option)

Both 11750 and 11850 would have 0 intrinsic value, therefore the net loss would be 40.

Case 3 – Market expires at 11850 (at the higher strike price, i.e the OTM option)

The intrinsic value of the 11850 CE would be = 100

Since we are long on this option by paying a premium of 70, we would make a profit of –

100 -70

= 30

The intrinsic value of 11850 CE would be 0, therefore we get to retain the premium Rs.30/-

Net profit would be 30 +30 = 60

Case 4 – Market expires at 11950 (above the higher strike price, i.e the OTM option)

Both the options would have a positive intrinsic value

11750 CE would have an intrinsic value of 200, and the 11850 CE would have an intrinsic value of 100.

On the 11950 CE we would make 200 – 70 = 130 in profit

And on the 11850 CE we would lose 100 – 30 = 70

The overall profit would be

130 – 70

= 60

Bull Call Spread

Amongst all the spread strategies, the bull call spread is one the most popular one. The strategy comes handy when you have a moderately bullish view on the stock/index.

The bull call spread is a two leg spread strategy traditionally involving ATM and OTM options. However you can create the bull call spread using other strikes as well.

To implement the bull call spread –

We need to buy 1 ATM call option (leg 1)

We need to sell 1 OTM call option (leg 2)

When you do this ensure –

All strikes belong to the same underlying

Belong to the same expiry series

Each leg involves the same number of options

For example –

Date – 20th April 2019

Outlook – Moderately bullish (expect the market to go higher but the expiry around the corner could limit the upside)

Nifty Spot – 11752.80

BUY ATM – 11750 CE, premium – Rs.70/-

SELL OTM – 11850 CE, premium – Rs. 30/-

Bull Call Spread, trade set up –

Buy 11750 CE by paying 70 towards the premium. Since money is going out of my account this is a debit transaction

Sell 11850 CE and receive 30 as premium. Since I receive money, this is a credit transaction

The net cash flow is the difference between the debit and credit i.e 70 – 30 = 40.

Generally speaking in a bull call spread there is always a ‘net debit’, hence the bull call spread is also called referred to as a ‘debit bull spread’.

We’ll be discussing 4 cases of expiry, to get a sense of what would happen to the bull call spread for different levels of expiry.

Case 1 – Market expires at 11650 (below the lower strike price i.e ATM option)

In case of 11750 CE, the intrinsic value would be = 0

Since the 117500 (ATM) call option has 0 intrinsic value we would lose the entire premium paid i.e Rs.70/-

The 7900 CE option also has 0 intrinsic value, but since we have sold/written this option we get to retain the premium of Rs.30.

So our net payoff from this would be –

-70 + 30

= 40

Do note, this is also the net debit of the overall strategy.

Case 2 – Market expires at 11750 (at the lower strike price i.e the ATM option)

Both 11750 and 11850 would have 0 intrinsic value, therefore the net loss would be 40.

Case 3 – Market expires at 11850 (at the higher strike price, i.e the OTM option)

The intrinsic value of the 11850 CE would be = 100

Since we are long on this option by paying a premium of 70, we would make a profit of –

100 -70

= 30

The intrinsic value of 11850 CE would be 0, therefore we get to retain the premium Rs.30/-

Net profit would be 30 +30 = 60

Case 4 – Market expires at 11950 (above the higher strike price, i.e the OTM option)

Both the options would have a positive intrinsic value

11750 CE would have an intrinsic value of 200, and the 11850 CE would have an intrinsic value of 100.

On the 11950 CE we would make 200 – 70 = 130 in profit

And on the 11850 CE we would lose 100 – 30 = 70

The overall profit would be

130 – 70

= 60

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