During a contract period when there is an earnings report due, the earnings announcement can dramatically shift the range in which the stock has been trading. I find that the best way to help establish the grounds for a meaningful comparison is through the use of an example. Let’s assume that there are two traders who are equally bullish on XYZ in the near-term and intend to use options to potentially capitalize on that bullish forecast. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. To put it another way, if the stock fell to $30, the maximum loss would be only $1.00, but if the stock soared to $100, the maximum gain would be $9 for the strategy.
To break even on the position, the stock price must be above the long call option by at least the cost to enter the position. While the long call in a bull call spread has no risk of early assignment, the short call does have such risk. Early assignment of stock options is generally related to dividends, and short calls that are assigned early are generally assigned on the day before the ex-dividend date.
Early Assignment Risk
The maximum risk of the bullish call spread is limited to the total premium paid in buying a low strike price call. Simply put, it will be the total premium invested in buying the lower leg or lower strike price of this call spread strategy. One can enter a more aggressive bull spread position by bull call spread strategy 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. Bull call debit spreads can be hedged if the underlying stock’s price has decreased.
- 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.
- The benefit of a higher short call strike is a higher maximum to the strategy’s potential profit.
- Backwardation implies a supply shortage because current demand is higher than the contracts that are scheduled for the future.
- This spread makes money if the backwardation widens or nearby prices increase more than deferred prices.
- Within the same expiration, buy a call and sell a higher strike call.
- The maximum profit from the strategy is limited to the differences between the strike prices minus the net spread .
If the stock price is at or below the lower strike price, then both calls in a bull call spread expire worthless and no stock position is created. If the stock price is above the lower strike price but not above the higher strike price, then the long call is exercised and a long stock position is created. If the stock price is above the higher strike price, then the long call is exercised and the short call is assigned.
The bullish call spread can limit the losses of owning stock, but it also caps the gains. The combination of a long call and short call is referred to as a spread trade. Risks and benefits of each individual option component, or leg, offset each other to a degree in order to create the desired position and range of possible outcomes.
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Writing Puts to Purchase Stocks
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