What is the bull spread options strategy?
A bull spread strategy in options is adopted by investors if they believe that the value of the asset will rise moderately. This is an optimistic strategy that is used by investors to reduce the risk potentials.
When the prices are declining, the investors can earn maximum profit by reducing the potential risks using the bull spread option strategy.
If an investor uses the call option for the bull spread option strategy for option, then it is called bull call spread strategy.
If the investor uses the put option for the bull spread option strategy, then it is called the bull put spread strategy.
What is Bull call spread strategy?
If the investor creates two call options with different strike prices, then it is known bull call spread strategy, then he will creates two call options. Out of these two call options, one has is with low-strike price and the other one is with high-strike price. When the investor shorts call, he is entitled to get some premium on it. This premium compensates for the long call sold/written first. In simple words, the investor buys a call option. At the same time he sells another option with higher strike price so he gets the benefit using this strategy. The expiry date is the same in both of the options. This is also known as a net debit because first, you have to pay the money to buy it. Investor’s Maximum Profit = long call - short call - net debit/net cost (premium) Investor’s Maximum Loss = Net debt/net cost paid of the options (premium) In the bull call spread strategy, when the prices of the underlying security increase, the bull call spread - profit increases to the short call options strike price. If the price of the underlying asset/security will go up beyond the price of the short call option, then the profit will stays as it is. Investors should adopt this strategy when there is a moderate rise in the stock. A bull call spread is among the popular strategies in the stock market.
Bull put spread strategy
When the investor believes that there will be a rise in the market in the price of the underlying assets, he uses a bull put spread strategy. The investors who wish to make a profit from the decline in the stock price sell/write a put option and buy a strike option that has a lower price.
Simply putting into words, the investor first decides to sell one put option and at the same time decides to buys different put option having low-strike price. So it is known in the stock market as a bull put spread strategy.
This is also known as a credit spread and it requires a margin to execute the trade. It further requires a margin trading account and your broker's appropriate trading level.
In put spread, the investor has to pay a premium so that he can buy the put option. On the other hand, he also gets a premium paid for selling a put option for a higher strike price. So this is how the investor gets the benefit. So, the maximum profit is the amount received from selling minus the amount paid for purchasing. Maximum loss is the difference of strike prices of both options minus net credit that the investor received.
A bull spread strategy in options helps the investor to earn the maximum profit possible. The important thing in a bull spread strategy in options is that the underlying assets should close at or above the available highest strike price. And if the underlying asset closes at or below the lowest strike price, then the investor would suffer maximum loss. As you can see in the above calculation, the investor gets maximum profit when there is a security trade aggregated about the short call strike price And if there is a security trade executed below the long call strike price, the loss is maximum. If you wish to find a perfect square calculator then you can search online. You will find many such calculators, but you have to pick the best Bull spread calculator that helps you in the calculation to maximize profit Let us now understand how breakeven is calculated. Break-even point = long call strike price + late premium Please keep in mind the below points when adopting call or put call bull spread strategies.
If there is a moderate price change expected: If the investor is expecting a great price change instead of moderate to then, he should better hold the long call. This options strategy is best suited in a situation when there is a moderate not use profit or gain spectated
Calculator available online you can add the current price of your stock, then you can add long call details like if you wish to buy or write. Then you will have a price option, and at last, you will need to get the number of contacts you have. You'll have to add these details in both put and call spread options. You can check the spread amount with the help of a bull spread calculator. After adding all the details you can simply click on the calculate button. What is the use and benefit implementing a bull spread strategy? If the investor wants to reduce the risk and limit the losses, the investor can be smart and strike a balance between two things i.e. collecting the premium on selling calls and paying the premium on buying the call.
When to use bull call spread and bull put spread?
The stock market-investor believes about the price of the underlying contract to fall marginally, or even move sideways. Compared with each other, the bull put spread offers lower chances of getting good rewards whereas with the bull call spread has more chances of getting good rewards. There are higher chances of success with bull put spread despite lower rewards and on the contrary the bull call spread has lower chances of success despite having good rewards.