Creating a bull call spread is a very popular option trading strategy that is usually one of the first ones new option traders learn how to build and trade. It can be created to generate big profitable returns while at the same time limiting overall financial risk.
A bull call spread can easily be constructed to generate profitable rates of returns like 50%, 100%, 200%… or even higher! You can actually construct the rate of return that you would like to earn before hand as this all depends on which individual options you select in constructing your bull call spread strategy.
You can also choose the desired time frame that you think will be necessary to achieve the maximum profit potentials by using option expiration dates like… 30, 60 or 90 days (or even longer, or shorter – if desired).
In order to achieve the maximum profit potential for the bull call spread, the price of the underlying stock (or other financial security) needs to be above the strike price of the call option that is sold (“shorted”) in this strategy at the option expiration date.
Of course, you don’t need to hold a bull call spread all the way to option expiration. You can sell it at any time to receive a portion of the maximum profit if it’s already somewhere in-the-money. For example, if your bull call spread is created to earn a 100 percent return at option expiration, you can sell it earlier if it reaches say 85 percent.
As the name implies, a bull call spread (a bullish strategy) is for a market that is rising in nature.
How To Create A Bull Call Spread
- Buy a call option at one strike price on an underlying financial security
- Sell (“short”) a call option at a higher strike price on the same underlying financial security
- Use the same expiration dates on all options bought & sold (“shorted”)
- Use the same number of option contracts on all options bought & sold (“shorted”)
Example – A Bull Call Spread Designed To Make 100% Return in 30 Days!
- Underlying stock is currently trading at $35.00
- The call option with a $35 strike price can be purchased for $2.50
- The call option with a $36 strike price can be sold (“shorted”) for $2.00
- 30 days to option expiration
- Bought & sold (“shorted”) one option contract (1 x 1)
- Underlying stock closed at $36.75 at option expiration
Let’s Calculate The Maximum Rate Of Return At Option Expiration (In 30 Days)
Gross Profit
$100.00
($36 – $35 x 100*)
Cost
$ 50.00
($2.50 – $2.00 x 100*)
Net Profit
$ 50.00
($100.00 – $50.00)
Breakeven Point
$ 35.50
($35.00 + $0.50)
Rate of Return in 30 Days
100%
($50 net profit divided by $50 cost)
(* the unit of one option contract equals 100 shares of the underlying stock)
In our example, the underlying stock price closed at $36.75 at option expiration. Since the stock price was higher than the $36 strike price call option that was sold (“shorted”), the option trader would have earned a 100% rate of return in 30 days at option expiration (commissions excluded).
Depending on how many option contacts that you plan to trade for this type of option strategy, it will determine the magnitude of the net profits in dollars. For example, if you did 5 call option contracts for this strategy this would be $250 in total net profits, 10 option contracts would be $500 in total net profits (so on and so forth) less commissions.
As a comparison to the strike prices used in our example above, you could have also used other combinations of strike prices as well. For instance, instead of using the $35/$36 strike prices, you could have also used say $35/$37.50 or $35/$40 or $37.50/$40 strike prices, or something entirely different. Depending on the combination of strike prices used in relation to the price of the underlying stock, it will change the rate of return that can possibly be earned.
Remember, part of the definition of doing a bull call spread is that the strike price of the call option that is sold (“shorted”) has to be higher than that of the strike price of the call option purchased.
Since option trading is all about leverage, did you notice the leverage that our bull call spread had compared to trading just the stock with respect to the rate of return? For a $1 dollar upside move in the price of the underlying stock by the end of option expiration (30 days), our option strategy earned 100% rate of return (commissions excluded). In comparison, to earn 100% rate of return by trading just the stock, it would have had to go from $35 to $70 (a $35 dollar upside move) less commissions.
Of course, with using leverage there is also associated risks involved. If the price of the underlying stock was at $35 or below at option expiration, you would have lost 100% of your money on this option trade.
Tip: in order to minimize this from happening, learning how to match bullish patterns of technical analysis to bullish option trading strategies like the bull call spread can greatly help in having a profitable trade.
Lastly
The bull call spread is a popular option trading strategy that can offer you a high profit potential while at the same time limiting your overall financial risk. It’s just one of the many popular option trading strategies that you can use to broaden your trading arsenal and possibly grow your trading account that much faster.
