Tim Olson
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1.5 KiB
1.5 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A bullish vertical spread buying a near-ATM call at K1 and selling an OTM call at K2 > K1 for a net debit, capping both profit and loss. |
|
Bull Call Spread
Section: 2.6 | Asset Class: Options | Type: Speculation
Overview
The bull call spread is a vertical spread consisting of a long position in a close to ATM call option with strike K1, and a short position in an OTM call option with a higher strike K2. This is a net debit trade. The trader's outlook is bullish: the strategy profits if the stock price rises. This is a capital gain strategy.
Construction
- Buy 1 call option at strike K1 (near ATM), paying debit D
- Sell 1 call option at strike K2 (OTM, K2 > K1), same expiry
Net debit: D = premium paid for K1 call - premium received for K2 call
Payoff Profile
f_T = (S_T - K1)+ - (S_T - K2)+ - D
- Breakeven: S* = K1 + D
- Max profit: P_max = K2 - K1 - D (achieved when S_T >= K2)
- Max loss: L_max = D (if S_T <= K1 at expiry)
Key Conditions / Signals
- Moderately bullish outlook; expects stock to rise toward or above K2 by expiry
- Prefer when implied volatility is low (cheaper debit to enter)
- Lower cost and lower risk than buying a naked call; upside is capped at K2
Notes
Both profit and loss are limited. The maximum gain equals the spread width minus the net debit. This strategy is appropriate when the trader has a directional view but wants to reduce the premium outlay compared to a simple long call.