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Bull Call Spread
When your feeling on a stock is generally positive, bull spreads
represent a nice low risk, low reward strategy. The easiest way to create
a bull spread is using call options at or near the current market price of
the stock. If the underlying stock is trading at $26, you could buy a 25
call and sell a 30 call.
Example
With DELL
Trading at $26.85, you might buy one JUL 25 call
and sell one JUL 30 call. By selling the 30 call, you
lower your exposure, but you also lower your upside potential. You would
have paid $2.95 for the 25 call and sold the 30 call for $0.50. In this
case, your total cost-and the most you could lose-would be $245 ($2.95 x
100 - $0.50 x 100).
| DELL
trading @ $26.85 |
| Buy |
1 DELL JUL 25
Call @ $2.95 |
$295 |
| Sell |
1 DELL JUL 30 Call @
$0.50 |
($50) |
| Cost of Trade |
$245 |
Your maximum profit is $255, the difference between the strike prices
less the $245 you paid to put on the position. Even if the stock goes to
50, you still only stand to make $255 because while your 25 call is worth
$25, the 30 call you sold is worth $20. To close the position, you would
have to pay $20 for the 30 call when you sell the 25 call for $25. This
limited upside is the price you pay for lowering your exposure (from $295
to $245) through the spread.
See also Bear
Put Spreads.
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