What is Bull Call Spread?
Bull Call Spread comprises one extensive call at a relatively lower price and a shorter call at a greater price. Both calls are based on the same company's securities and expire that same day.
Understanding Bull Call Spread
It is set up for a net negative or net expense and gains when the value of the underlying security rises. If the price is increasing beyond the market price of the short call, profit is restricted, and possible loss is minimized if the stock falls underneath the market price of that extensive call.
Formulas
The following methods can be used to calculate the massive profits, greatest loss, and break-even point (BEP) for a bull call spread:
- Maximum Profit = Strike Price of Short Call - Strike Price of Long Call - Net Premiums
- Maximum Loss = Net Premiums
- Break-Even Point = Strike Price of Long Call + Net Premiums
Advantages
- An increase in the price of a stock might result in limited rewards for shareholders.
- It is less expensive than purchasing a single call option
- The bullish call spread restricts the potential loss of holding a share of the policy's net expenditure
Practical Example
Lana intends to use a bull call spread on RFX Corporation. RFX Corporation is presently selling at $180 per share. She pays an $8 price for the in-call option. The plan has a strike price of $140 that matures in June 2021. Lana also carries the out-call option for a $4 payment. The call has a strike price of $200 and matures in June 2021.
The net commission is $4 ($4 OTM Call – $8 ITM Call).
Applying the methods for a bull call spread, Lana determines the:
- Maximum profit = $200 – $140 – $4 = $ 56
- Maximum loss = $4
- Break-even point = $140 + $4 = $144
In Sentences
- The bull call spread lowers the price of the callable option, but there is a price to it.
- One major disadvantage of utilizing a bull call spread is that possible rewards are restricted.