Call Spread option strategy has good reward to risk, and can be used if
you are very bullish on a stock.
option-info and options-graphs sites:
Call , (ATM
strike to 1 strike up)
Bull Call Spread, Bull Call Vertical
Outlook: Very bullish. The stock must rise at least as much as your
debit just to breakeven. The stock must rise more to show a gain.
buy Call ATM and sell Call OTM.
when: stock rises enough to overcome the initial debit.
Gain: difference in strike prices - initial debit.
when: stock falls, does not rise, or does not rise enough.
Loss : limited to the initial debit.
Calculation: Long Call strike + initial debit.
compared to stock: limited risk, less capital needed, greater leverage.
compared to stock: gains are limited to the upside if stock rises
more than the sold strike, no dividends.
after entry, increasing implied volatility is positive if the stock
falls, but negative if the stock rises.
after entry, the passage of time is positive if the stock rises,
but negative if the stock falls.
Requirement: None. The initial debit must be paid in full.
see the Vertical Spread Strategies page and
Bull Call debit spread
Equivalent: Long Stock plus Long Put plus Short Call. (A "collar".)
Bull Call can be used if you are very bullish on a stock, but want to
reduce the cost of entry compared to just buying an ATM Long Call. This
is especially true if the options have a higher-than normal IV. Just
buying a long call puts you at a disadvantage in terms of the higher
price caused by the higher IV. If you also sell a high IV call, you
level the playing field.
- The short
call(s) will limit gains to the upside, so you don't want to be "too"
- This Bull
Call can be used to anchor trading in a stock you expect to be volatile
above the long strike. For instance, after entering the position, you
could take gains on the short calls whenever there is a volatile day
to the downside, and sell the calls again whenever there is a volatile
day to the upside. Every gain taken on short call buybacks reduces your
risk by the amount of the gain. It is possible to end up with a zero
risk long call, also known as a "free
ride". This is by no means a guaranteed outcome.
- This Bull
Call can be used as part of a "stock enhancement" strategy.
See the Stock
this is a very bullish position, the trader is expecting the stock to
rise. If the stock falls instead, the trader would be wise to cut his
losses short. If the stock falls below the long strike and the time
to expiration drops to just a couple weeks, you can see from the option
graph that the loss will be less than the maximum, and it is probably
best to take it. Just sitting and waiting could likely result in the
- If the
stock rises most of the way to the sold strike, the trader should stick
with the position. As the option graph shows, just the passage of time
is a benefit at any stock price near the sold strike.
- If the
stock rises over the strike you sold and you do not trade out of the
position before expiration, it is possible to receive an automatic exercise
on the long call, so you will buy the stock, and be assigned on the
short call, so you will sell the stock short. See the Rules,
Tips, & Techniques page for more.
- It is
not usually recommended to adjust one part of a Bull Call. If you take
a trading profit on the short calls when the stock drops for instance,
you are actually increasing your maximum risk. You might think you will
sell the calls again the next time the stock goes up, but what if it
- It is
possible to roll the entire bull call to lower strike prices if the
stock drops, but that really amounts to closing one trade at a loss
and opening another trade in hopes of a gain. Plus, the stock has not
behaved bullishly yet you are taking a second bullish position.
- If a bull
call works out better than you expected and you want to stick with the
stock, you can buy back the short calls, and exercise the long calls,
so that you end up with just stock, with all the inherent risks and
- Or if
the stock rises to near the sold call strike with expiration near and
you have made 80% or so of the total possible on the short calls, you
can roll everything out to the next month, and higher strike prices,
if you are still bullish on the stock.