Options trading for beginners: Bull Call Spread option trading strategies

Options trading for beginners: In this post we will discuss options strategies that is bull call spread,  It is very helfull for Options Seller,  There are several other strategies like Bull Call Spread, Bull Put Spread, Call Ratio Back Spread, Bear Call Ladder and so on. So let’s start.

By trading in Options either stock Option or Index option you can earn money by two ways either by buying the options or writing the options, but in the post we will mostly focus on top Options writing strategies.

Spread option trading strategies

Spread are multileg strategies involving 2 or more legs, where you buy and sell the options, we can categorize them in Bull call spread, Bull put spread, Bear call spread and Bear put spread, so let’s discuss them one by one.

Bull Call Spread

We apply Bull Call Spread strategy when the outlook of the stock or index are moderately not very aggressive, or we can say stock or index could go up with a limited upside.

Bull call Spread executed for a debit not credit.

Implemetation:

 Buy 1 ATM (at the money) call Option (leg 1)

Sell 1 OTM (Out of the money) call Option (leg 2)

Conditions: These Options will belongs to same underlying asset (stock or Index), same expiry series and same no of options, means if you bought 2 ATM call options then you will Sell 2 OTM call Options and so on.

Example:

 Lets understand it with an example

Suppose Bank Nifty is trading at sport price 41648,  and we have moderate view, means bank nifty will go up but not very aggressively.

Then we will buy one lot of bank nifty ATM call option which would be 41700 at the price of 195 and will sold one lot of OTM call option (out of the money) which would be 42000 at the price of 81.

Therefore our transaction is we have paid the premium of 195 and will get the premium of 81, so our net debit would be 195-81= 114, means we have paid 114 which will be called net debit.

Now we will check different scenarios for expiry

If Bank Nifty Expires at 41600

If bank nifty expire at 41600 then the intrinsic value of our call 41700 would be zero and we will lose all the paid premium of 195.

On the other side we will get the premium of 81 which we will get by shorting the call of 42000.

So our net loss would be = Premium paid – Premium received

                                            = 195- 81 = 114

So we will be in net loss of 114 points, if the market closed below 41700 levels, similarly for all the strike price below 41700, our maximum loss would be 114 which is net debit.

If the bank nifty expires at 41900 level

Now we get a different scenario, as we said our outlook is bullish therefore if the bank nifty expires at 41900 level

Then the intrinsic value of our call 41700 would be 200 and we have already paid 195 so we will get only 5 points (200- 195).

On the other side if we will get the premium of 81 from 41900 call which we have sold.

Therefore our profit would be 5+81= 86 points.

Now we check 3^rd scenario of the bank nifty expires at 42000 level then

The intrinsic value of 41700 call would be 300 and we have paid 195 of premium so we will get (300-195) = 105

On the other side the intrincic value of call 41900 would be 100 and so there will loss (100-81)= 19 points

Hence our net profit would be 105- 19 = 86 points.

So the conclusion is in any case our profit and loss is limited. If the bank nifty expires at above then we will get maximum 86 points of profit and below our maximum loss would be 114 points.

Conclusion:

Bull Call Spread max loss =  Net debit of the strategy

Net debit = Premium paid for lower strike price – Premium received from upper strike price

Spread = difference of upper strike price – lower strike price = 41900-41700= 200

Bull call spread maximum profit= Spread – net debit