An Overview of Bull Spread Trading - An Option Trade TypeA Bull Spread, a type of option trade, is created by buying a call option on a stock with a certain strike price (right to sell stock at a predetermined price, called the Strike price, at any time before the expiration date) and selling a call option on the same stock with a higher strike price. This strategy could also be implemented by selling put options on a stock with a certain strike price and buying a put option on the same stock with a lower strike price.Bull Spread FactsFacts about Bull Spreads: * Both the strikes must have the same expiration date. * Bull Spreads are used when traders are bullish yet want limited risk. * Maximum loss is when the stock is below the lower strike price, and maximum profit when the stock is above the higher strike price * These strategies require higher commissions since they involve buying or selling multiple positions. Bull spreadsAlthough can be created with either calls or puts. The following illustration of call option gives a clear picture of this form of trading. If XYZ is trading at $32, you could create a bull spread by purchasing 1 XYZ JUN 30 CALL for $3 and at the same time selling 1 XYZ JUN 35 CALL for $1. This option trade would be a net-debit of $2. In other words, it would cost you $2 to create the spread ($3 to buy the JUN 30 CALL less $1 received from the sale of the JUN 35 CALL).
Bull Spreads works in a manner that the profit and loss from the two calls (or putts) are used to offset one another. So, the maximum one can lose with a bull spread is only the cost of the spread. In the above example you can lose a maximum of $2. In addition, the maximum you can gain from a bull spread is the difference between the two strike prices less the cost of the spread. In this case, it is $3 (35 - 30 - 2). Day-Trading-Strategy .com, P.O. Box 89029, Houston Texas, 77289 info@Day-Trading-Strategy.com |