Create Bull Call Spread maximum Profit

profit loss diagram of bull call spreadA bull call spread or a debit spread is a type of vertical spreads. Entering a bull call spread entails buying a call and then selling another call at a higher strike with the same expiration month. The strike price of the short call is higher than the strike of the long call, which means that you have to pay a debit for this strategy. The short call’s main purpose is to lower your cost base of the trade. This is considered as a low risk trade.

The bull call spread or debit spread works a lot like a standalone long call strategy. However, the upside potential is capped. By selling the short call you don’t have to pay much capital but it also sets a ceiling on the profits. This strategy is used when the Implied Volatility is low.

A different pair of strike prices might work, provided that the short call strike is above the long call’s. The choice is a matter of balancing risk/reward trade offs and a realistic forecast.

Stock Option selection

We are looking for stocks who had a significant move, like LULU. When you look at the chart you assume that the price will go higher, but you know the upside may be limited. You want to buy a call to profit from a rally, and sell higher strike calls to reduce cost base and to lower your risk. because of this setup your break even is more favorable and your max loss potential is lower. If the stock rallies, preferably above the upper strike, you’ll profit.

 

How do you setup the trade

When we are selling option premium and decide to use a low risk strategy. We choose a bull call spread.  When volatility is low we buy debit spreads and when volatility is high we sell credit spreads. Volatility is not that high so we buy  a debit spread. We sell one strike in the money and one strike out of the money with approximately 45 days to expiration.

 

Video on Bull Call Spread

In the program of Where do I start Case trades her first Call Spread. Tony takes her smoothly to the process of stock selection and how to setup the trade. In between the lines he gives a lot of tips. Watch the video to discover them.

 

Bull Call Spread

Mechanics of the bull call spread trade

In the video they took a look at lulu and saw that stock lulu had a dip, It is trading for 67.74 Usually It trades higher. We have a bearish assumption. They look at the VIX and then look at the current IV of the stock. They select a vertical spread called ‘bear call spread’. They could buy the march call 65 and sell the call 67.5 for 1.5$ debit. The break even for this trade is $ 66.5. With this bull call spread strategy Case has 50% chance to make a profit. The stock may go up or side ways and you still make money.

 

Conclusion

Create Maximum Profit by using a bull call spread. With a bull call spread you want to take advantage of an up move of a stock. You buy an option and to reduce your trade cost you sell an options as well. In this way you reduce your cost basis, the stock doesn’t have to move much to make this stock profitable. Read also how to reduce costs in spreads

I hope you enjoyed to sell option premium using the bull call spread. The next strategy we discuss is a Bear Put Spread

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