Option Spread Strategies

Traders who trade large number of contracts in each trade should check out OptionsHouse. Options finance Derivatives finance. Some stocks pay generous dividends every quarter. If constructed using puts, it is a bull put spread. By using this service, you agree to input your real email address and only send it to people you know. Important legal information about the email you will be sending.

A bull spread is a bullish, vertical spread options strategy designed to profit from a moderate rise in the price of the underlying security. It's comprised of the simultaneous purchase and sale of either call options or put options with different strike prices but with the same underlying asset and expiration date.

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The vertical bull spread is a vertical spread in which options with a lower striking price are purchased and options with a higher striking price sold. Depending on whether puts or calls are used, the vertical bull spread can be established with a credit or a debit. A vertical bull spread can be established for a credit if put options are used.

The strategy is also known as the bull put spread. A vertical bull spread can be established for a debit if call options are used. The strategy is also known as the bull call spread. The bull calendar spread and the diagonal bull spread are both time spread strategies used by option traders who believe that the price of the underlying security will remain stable in the near term but will eventually rise in the long term. Buying straddles is a great way to play earnings.

Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable.

For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time The bull call spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go up moderately in the near term.

Bull call spreads can be implemented by buying an at-the-money call option while simultaneously writing a higher striking out-of-the-money call option of the same underlying security and the same expiration month. By shorting the out-of-the-money call, the options trader reduces the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price skyrockets.

The bull call spread option strategy is also known as the bull call debit spread as a debit is taken upon entering the trade. Maximum gain is reached for the bull call spread options strategy when the stock price move above the higher strike price of the two calls and it is equal to the difference between the strike price of the two call options minus the initial debit taken to enter the position.

The bull call spread strategy will result in a loss if the stock price declines at expiration. Maximum loss cannot be more than the initial debit taken to enter the spread position. The underlier price at which break-even is achieved for the bull call spread position can be calculated using the following formula. While we have covered the use of this strategy with reference to stock options, the bull call spread is equally applicable using ETF options, index options as well as options on futures.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse. The following strategies are similar to the bull call spread in that they are also bullish strategies that have limited profit potential and limited risk. One can enter a more aggressive bull spread position by widening the difference between the strike price of the two call options.

However, this will also mean that the stock price must move upwards by a greater degree for the trader to realise the maximum profit. It's primarily used when the outlook is bullish, and the expectation is that an asset will increase a fair amount in price. It's often considered a cheaper alternative to the long call , because it involves writing calls to offset some of the cost of buying calls.

The trade-off with doing this is that the potential profits are capped. On this page, we provide further details on this strategy, specifically covering the following. The main reason why you would use this spread is to try and profit from an asset increasing in price.

You would typically use it when you expected the price of an asset to increase significantly, but not dramatically as the profit potential is limited.

The strategy is basically designed to reduce the upfront costs of buying calls so that less capital investment is required, and it can also reduce the effect of time decay. There are two simultaneous transactions required. You would use the buy to open order to buy at the money calls based on the relevant underlying security, and then write an equal number of out of the money calls using the sell to open order. This results in a debit spread, as you spend more than you receive.

The basic idea of writing the calls in addition to buying them is to reduce the overall costs of the position. The big decision you have to make when putting this spread on is what strike price to use for the out of the money contracts you need to write. The higher the strike price, the more potential profits you can make but the less money you receive to offset the costs of buying at the money calls.

As a general rule of thumb, you should write the contracts with a strike price roughly equal to where you expect the price of the underlying security to move to. This spread can make profits in two ways. First, if the underlying security increases in price, then you will make profits on the options that you own.

Second, you will profit from the effect of time decay on the out of the money options that you have written.

Horizontal & Diagonal Bull Spreads

An options trader believes that XYZ stock trading at $42 is going to rally soon and enters a bull call spread by buying a JUL 40 call for $ and writing a JUL 45 call for $ The net investment required to put on the spread is a debit of $ Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk. In options trading, a bull spread is a bullish, vertical spread options strategy that is designed to profit from a moderate rise in the price of the underlying security. Because of put-call parity, a bull spread can be constructed using either put options or call options.