Bull Call Spread Simplified – Real Life Example

Bull Call Spread or sometimes called Call Debit Spread is another vertical options strategy to make money when market or a particular underlying stock is going up.

This type of trade is referred to as debit because a trader needs to pay upfront out of his account and no margin is required.

The name Bull Call Spread has 2 parts to it.  Bull and Call Spread.

Bull is up-trending market or underlying product going up in price.

Call Spread involves buying a lower strike call and selling a higher strike call in the same expiration month.

It opens up a world of opportunities to trade expensive stock like Google (GOOG).

Imagine when Google was at its all time high of $720, to trade a straight call to anticipate an up-move would cost you about $10,000 per contract.

When trading Call Spread, you effectively finance the trade with a higher strike options sale and significantly reduce the cost of doing business.

It is recommended that the premium from selling options you collect is at least 1/3 of the lower strike options you purchase.

This is because when you sell that option, you limit your potential reward and you would want a fair compensation for that. 1/3 is known to be a good trade-off.

Let’s go over a quick example of a Bull Call Spread

At the point of this writing, Google (GOOG) is trading at $613.70 per share and the prognosis is it will go up to $660 in 3months times.

So the call spread we will go for is:

Buy GOOG Jan 11 630 for $25.40

Sell Google Jan 11 660 for $13.70

For a net debit of $25.4 – $11.4 = $11.70

Since we have to buy at least 1 contract that controls 100 shares, the final cost is $1400 for this trade.

Max = Debit = $1400

Max Reward = Distance between 2 strikes – Max risk = (660 – 630) – $11.70 = $18.30 or $1830 for 1 contract.

There you have a basic understanding of Bull Call Spread.

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Happy Trading,

Category: OPTIONS BASICS