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Bull Call Spread
Call Debit Spread
A Bull Call Spread is an options strategy where one simultaneously buys a call (long) and sells a call (short) with the same expiration date. The long call strike is also below the short call strike.
- Different strike price and same expiration date
- Directional strategy
- Typically consists of simultaneously buying a call with a lower strike price and one short call with a higher strike price.
A Bull Call Spread typically consists of writing a call and put option. The resulting net premium of this option will be positive as it represents a promise to a range of positive payoffs in the future; therefore, funds are initially debited to (removed from) the options trader's account when the position is entered.
For this example, we are using an ITM call.
Example: Suppose the current price of Bitcoin is $20,500. We want to buy a long call with a strike price of $16,000 and an expiration date of Dec 30, 2022.
Cost of premium to buy: - $4,500
However, we want to minimize uncapped losses, so we simultaneously sell a put with a strike price of $21,000 and the same expiration date as the long call.
Premium earned: $1,500
Net premium: -$3,000 is the amount as a trader that you would pay to put on this particular option strategy.
Breakeven point = $18,300
This means that if the price of the underlying token is $19,000, you would break even.
Potential Maximum Profit
If the price is $21,000 or above, you get a maximum profit of $1,500
Potential Maximum Loss
If the price is $16,000 or below, you lose your entire initial net premium paid -$4,500.
To understand some of the tradeoffs of a debit call spread, it’s important to think about the case when you just bought the $16,000 call and did not add a short call. From the PnL diagram, all upside above the point at which the curves intersect is reaped by the call but not the bull call spread. However, there is a bigger potential loss on the downside. Thus, you have to give up potential upside to reduce potential losses.
Last modified 3mo ago