Imagine a stock is currently trading at $50. An investor speculates that the stock will experience a moderate rise over the next month, but not exceed $55. To capitalize on this outlook, they opt for a bull call spread.
Here’s how the investor executes this strategy:
- Buy a Call: The investor purchases a $50 call option for a premium of $3, incurring a cost of $300 (since 1 option contract typically represents 100 shares). By buying this call, the investor expresses their belief that the stock will rise above $50.
- Sell a Call: To offset some of the costs and enhance potential profitability, the investor sells a $55 call option, receiving a premium of $1 or $100 for one contract.
The total expenditure (or net debit) for setting up this spread is $200 ($300 paid for the bought call minus the $100 received from the sold call).
- Stock exceeds $55 at expiration: Both call options come into play. The maximum profit is the difference between the strike prices minus the net debit paid, translating to $300 ($500 difference in strike prices minus the $200 net debit).
- Stock remains below $50 at expiration: Both call options expire worthless. The loss for the investor equals the net debit of $200.
- Stock lands between $50 and $55 at expiration: The outcome here is more nuanced. The bought $50 call will be in-the-money, but the sold $55 call remains out-of-play. The precise profit or loss hinges on the stock’s exact position in this range.
By implementing the bull call spread, investors stand to gain from a moderate bullish stance on the stock, all while delineating and limiting potential losses.
Disclaimer: This article is for informational purposes only and is neither investment advice nor a solicitation to buy or sell securities. Investing carries inherent risks. Always conduct thorough research or consult with a financial expert before making any investment decisions.
p.s. If you don’t yet have a BBAE account, we are still offering an up to $400 sign-up bonus for your first deposit. Get it while it lasts!