What is the spread of a bull call?
bull distribution is an investment strategy involving two options for the same assets with the same expiration date. In this approach, the investor will buy the possibility of calling shares for a strike price at the current price of the underlying asset in the near future and sells the possibility of calling with the price of strike, which is slightly higher than the current price. The investor uses the spread of bull calls when they believe that the stock price in the near future will increase, but only to a slight extent. The spread of bulls allows the investor to benefit from price growth, but also reduces the risk of investment. When using this strategy, the investor can predict its maximum potential loss, its uniform point and its maximum profit.
For example, Warbucks Coffee is currently traded for $ 20 US dollars (USD) per share. The investor in anticipation of the Warbucks Coffee stocks in the next month buying the option isDenno calls for 100 shares at the price of a $ 20 strike with an expiration for one month for a $ 300 payment. It also sells the possibility of calling for 100 shares for a $ 25 strike with an expiration in one month for a bonus of $ 100. Over the next month, Warbucks coffee increases to $ 24 per share. Bull's call spreading results in a $ 200 profit for an investor, which is calculated by multiplying 100 shares by $ 4 by an increase in the price of a minus $ 300 payment for the first option plus a bonus of $ 100 per second option.
The maximum potential loss with the spread of a bull call is a mismatch between a paid bonus and a received investor for two call options. If the stock price does not increase as expected, the possibilities are not worth expiry and the investor will lose what he has paid for. The equal point of the break for the spread of bull calls is determined by division of COSTS by 100 and then adding the obtained value to the lower price of the strike. In the example, there is a balanced point where the stock price increased to $ 22 per share. With this strategy, the investor will make a profit,If the stock price moves to any value between $ 22 and $ 25.
If the stock price increases to a value of more than $ 25 per share, then the bull spread will limit the profit potential. The second call option, while limiting the risk of disadvantage, also limits maximum profit. If the price is deploying $ 30 per share, the investor will receive $ 10 USD per share with the first option and lose $ 5 per share with the second option. Although he would still receive a profit of $ 300 on the agreement, he lost $ 500 by having a second call. For this reason, the spread of bull calls makes sense only when the expected increase in the market is modest with the upper limit of this increase somewhat predictable.