Bull Call Spread – How to Draw A Correct Risk Graph
In this tutorial, I will show you how to draw a correct risk graph for a Bull Call Spread trade.
Before we can draw a risk graph we need some information such as:
Options Strike Price
Price of Purchased Options
Max Risk, Max Reward
Breakeven point is optional to draw a graph but good to know and keep in mind.
To easily demonstrate the process, we will use a real-life example of EBAY stock with Jan 11 30/32 Options.
Currently, EBAY is trading at $29.86 and 30 Call options priced at $1.75 while the 32 strike could be sold for $.93.
We will need to purchase at least 1 contact of 30 Call options and sell 1 contract of 32 Call options that controls 100 shares of stock.
With that in mind, we can calculate the max risk and reward of the trade.
Max Risk = Debit = Cost to Buy 30 call – Premium collected when selling 32 call = $1.75×100 – $.93 x100 = $82 per trade.
Max Reward = Distance between 2 strikes – Max Risk = (32 – 30) x100 – $82 = $200 – $82 = $118 per trade.
Breakeven Point = 30 strike + Debit = 30 + $0.82 = $30.82
Now we can construct the graph with ease.
1st draw 2 fine vertical line thru the 30 and 32 marks
2nd draw 2 fine horizontal line thru the $82 mark on the loss/risk side and $118 mark on the profit side.
3rd mark the intersections B and C as per illustrated
Finally draw 3 lines joining A, B, C and D
There you have a perfect graph for a Bull Call Spread trade.
Category: bull call spread
