Learn Bull Call Spread Or Bull Debit Spread To Trade Like A Pro
Bull Call Spread (Debit Call Spread):
A bull call spread is also known as debit call spread is a bullish options trading strategy with insurance. Buying a lower strike call options, at the same time selling a higher strike price call options of the same underlying and same expiry date.
When the trader believe the underlying will move up but due to higher volatility options premium contain more time value, then buying only call options is risky, if traders hold it overnight then time value decay may cause loss for the buyers even if the underlying move up slowly. To survive from this outcome traders sell higher strike call option than they buy.
Positivity:
Limited risk: Risk is limited for the traders, even smaller than only call buying. The risk is only the net premium paid even if underlying fall drastically.
Negativity:
Limited profit: Even if the underlying move up faster than a trader expected, still profit will remain limited, trader won't able to utilize the faster momentum. Maximum profit could be less than your maximum risk.
Technical Scenario:
When underlying price approach a higher timeframe demand zone and traders found a price action confirmation in lower time frame chart at the zone they go for Bull call spread options strategy. Or when they found a lower timeframe buying opportunity in chart pattern while there is a primary demand in higher timeframe chart. (Please note demand zone is a secondary demand, primary demand is a clear institutional buying)
More elaborately, traders do bull call spread when they found trend line breakout / morning star / hammer pattern / bullish engulfing / piercing pattern / positive divergence etc after a higher time frame demand zone
Example:
Assume ABC Ltd trading at 503.00 and you are bullish on it, technically a price action buying scenario occurred in lower timeframe chart at higher timeframe demand zone, you are very bullish on it but the options premium is too high. You see 490CE trading at 22, the intrinsic value of 490CE is 13/- where time value is 9/- so you are afraid that if the stock remain standstill or move up but slowly then you will lose money. So you decide to sell 500CE @ 13, intrinsic value of 500CE = 3/- and time value=10/- (As 500CE is ATM therefore the time value will be more than the ITM which is 490CE)
Let's calculate.
Long 490CE @ 22
Short 500CE @ 13
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Net premium paid=9/-
Breakeven point= Strike Price of Long Call + Net premium paid
= 490 +9
let me explain the formula mathematically for better understanding.
Assume ABC Ltd closed at 499 on expiry
Value of 490CE = 9, P/L=-13
Value of 500CE= 0, P/L=+13
--------------------------------------------
Maximum loss possible=9/-
Maximum profit: As I mentioned earlier that maximum profit could be less than your risk, here we will see that.
Maximum profit = Strike difference - net premium paid
= 10 - 9
So you can see, in this strategy maximum profit possibility is only 1/- where maximum loss is 9/-
Why this outcome?
This outcome occur because of strike selection, if we choose two consecutive strike price options, one for buying and another for selling, then always this outcome we will see.
Which mean if we can keep a good gap between two strike price then only the possibility of maximum profit will be greater than maximum loss. Keep this thing in mind while selecting strike price for bull call spread.