InvestorQ : How does a bull call spread work and when can I use this strategy?
sara Kunju made post

How does a bull call spread work and when can I use this strategy?

Answer
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Riya Dwivedi answered.
3 years ago
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In a bull call spread, you buy a lower strike call option and sell a higher strike call option of the same stock or same index for the same expiry. You normally use this strategy when you are moderately bullish. Check the payoff table below.

Buy RIL Dec 1120 call at Rs.33 and Sell RIL Dec 1180 call at Rs.13

Long Call Strike

RIL CMP

Difference

ITM/OTM

Profit/Loss

Option Premium

P/L on Long Call

Short Call Strike

RIL CMP

Difference

ITM/OTM

Profit/Loss

Option Premium

P/L on Long Call

Net Profit

1120

900

-220

OTM

0

-33

-33

1180

900

-280

OTM

0

13

13

-20

1120

920

-200

OTM

0

-33

-33

1180

920

-260

OTM

0

13

13

-20

1120

940

-180

OTM

0

-33

-33

1180

940

-240

OTM

0

13

13

-20

1120

960

-160

OTM

0

-33

-33

1180

960

-220

OTM

0

13

13

-20

1120

980

-140

OTM

0

-33

-33

1180

980

-200

OTM

0

13

13

-20

1120

1000

-120

OTM

0

-33

-33

1180

1000

-180

OTM

0

13

13

-20

1120

1020

-100

OTM

0

-33

-33

1180

1020

-160

OTM

0

13

13

-20

1120

1040

-80

OTM

0

-33

-33

1180

1040

-140

OTM

0

13

13

-20

1120

1060

-60

OTM

0

-33

-33

1180

1060

-120

OTM

0

13

13

-20

1120

1080

-40

OTM

0

-33

-33

1180

1080

-100

OTM

0

13

13

-20

1120

1100

-20

OTM

0

-33

-33

1180

1100

-80

OTM

0

13

13

-20

1120

1120

0

ATM

0

-33

-33

1180

1120

-60

OTM

0

13

13

-20

1120

1140

20

ITM

20

-33

-13

1180

1140

-40

OTM

0

13

13

0

1120

1160

40

ITM

40

-33

7

1180

1160

-20

OTM

0

13

13

20

1120

1180

60

ITM

60

-33

27

1180

1180

0

ATM

0

13

13

40

1120

1200

80

ITM

80

-33

47

1180

1200

-20

ITM

-20

13

-7

40

1120

1220

100

ITM

100

-33

67

1180

1220

-40

ITM

-40

13

-27

40

1120

1240

120

ITM

120

-33

87

1180

1240

-60

ITM

-60

13

-47

40

1120

1260

140

ITM

140

-33

107

1180

1260

-80

ITM

-80

13

-67

40

1120

1280

160

ITM

160

-33

127

1180

1280

-100

ITM

-100

13

-87

40

1120

1300

180

ITM

180

-33

147

1180

1300

-120

ITM

-120

13

-107

40

1120

1320

200

ITM

200

-33

167

1180

1320

-140

ITM

-140

13

-127

40

1120

1340

220

ITM

220

-33

187

1180

1340

-160

ITM

-160

13

-147

40

1120

1360

240

ITM

240

-33

207

1180

1360

-180

ITM

-180

13

-167

40

1120

1380

260

ITM

260

-33

227

1180

1380

-200

ITM

-200

13

-187

40

1120

1400

280

ITM

280

-33

247

1180

1400

-220

ITM

-220

13

-207

40

1120

1420

300

ITM

300

-33

267

1180

1420

-240

ITM

-240

13

-227

40

1120

1440

320

ITM

320

-33

287

1180

1440

-260

ITM

-260

13

-247

40

Here are there are two distinct positions. You are buying RIL Dec 1120 call at Rs.33 and simultaneously selling Rs.1180 call at Rs.13. Effectively, your net cost of the strategy is Rs.20 (33 – 13). This will be your maximum loss as you can see in the table above. At no point does the maximum loss exceed Rs.20. On the upside your maximum profit will be earned at the strike of Rs.1180 where you have sold the call. Beyond that point, whatever you earn on the 1120 call you will lose on the 1180 call which you have sold. The breakeven point is the lower strike plus the net cost of Rs.20 which is Rs.1140 where you will see that the profits are zero. This strategy should ideally be used only when you are moderately bullish so that you can reduce your cost of buying a call option by selling a higher call option. As you can see in the table above, above Rs.1180, your profits peak out at Rs.40, which is where it will continue in the future too.
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