• Options Course
  • High Level Options
  • Privacy Policy
  • Terms of Use
  • Cookies
  • Financial Disclosure
How to Trade Options » OPTION SPREAD TRADING » Bull Call Spreads – A Step by Step Action Guide

Bull Call Spreads – A Step by Step Action Guide

Bull call spreads are option trading strategies involving the simultaneous purchase of call options at a lower strike price and shorting (selling) the same amount of call options at a higher strike price. Both long and short positions will have the same expiry date.

They are called “bull call spreads” because you enter them on the understanding that the outlook for the underlying financial instrument is bullish and you’re creating an overall debit position in your account using call options.

Being a vertical debit spread, the bull call spread will enable you to enter a position much cheaper than simply going long the call options, as well as allowing greater flexibility if the underlying share price should not proceed in the anticipated direction.

To place a bull call spread, do the following:

1. Search the market or analyze your watchlist for a stock you expect to be modestly bullish. Look at a chart showing trends and price action for at least the past year, to determine where the stock is in its overall price cycle.

2. Ensure there are options available for this stock and that there is sufficient liquidity to enter and exit the trade easily, without being at the mercy of market makers.

3. Bull call spreads are most effective for options with at least 90 days to expiry, so check option premiums for strike prices with at that timeframe. You may even wish to consider using LEAPS options for this purpose.

4. Check the implied volatility in the option prices you are considering, to see if any are overpriced or underpriced. Overpriced options for the short leg of the trade give you an advantage, but they are not essential to a successful trade. Beware of overpriced premiums for the long (bought) leg of the spread.

5. Decide which lower and higher strike prices are most appropriate for your spread. You should consider at least 10 percent of the current market value of the share price as a basis for your strike price difference.

6. Consider the following before deciding which spread is best:

(i) Limited Risk – the net debit to place the trade is your maximum loss
(ii) Limited Reward – the difference in strike prices minus the net debit to place the trade.
(iii) Breakeven – the net debit plus the lower strike price
(iv) Return on Investment – the maximum potential reward divided by the amount risked.

7. Create a risk graph to visually represent the trade’s potential. You can use freely available downloadable software such as from Peter Hoadley for this purpose.

8. Make a note in your trading journal of the details of the trade and the reasons why you chose it.

9. Plan your exit strategy before placing the trade. For example, you may consider exiting half the trade once its overall value has doubled, leaving the remainder as a risk-free trade, which you could let run without stress for greater profit potential. Or you may simply wish to set a target such as 80 percent profit for your exit. Option prices work in such a way that the last 20 percent usually takes much longer to realize in a verticial debit spread, so your money would be better used elsewhere.

10. Contact your broker or go online and place your trade. Make sure you do it as a limit order to minimize the cost of the trade.

11. Watch the market in the ensuing days. If it falls below the breakeven but you believe it will rise again, you may wish to consider waiting till the (higher) short position is very cheap and closing it out. This will leave your long position still current – and even if the stock only returns to its original price, will usually make you a profit. This strategy is best suited for a stock that has already made a sustained downwards move before you place the trade. Otherwise, go to the next step.

12. Decide when to exit based on what happens to the underlying stock.

(i) If it rises above the short strike price – the maximum profit becomes available and moreso with the passing of time as option theta (time decay) goes to work.

(ii) If it rises above the breakeven but not as high as the short strike price – close out the entire position for some profit.

(iii) If it remains below the breakeven but above the long strike price – there may still be a small profit in it, if time value or implied volatility works in your favour. Decide whether to close the trade or risk waiting until expiry date and then sell the long call while letting the short call expire worthless.

(iv) If the underlying stock falls below the long call strike price – consider the strategy in point 11, or close the entire position if you think the stock won’t recover.

bull call spread options strategy

You Might Also Like

  • Bull Call SpreadsBull Call Spreads
  • ETF Options TradingETF Options Trading
  • Victory Spreads Options – ‘Return on Risk’ on Steroids!Victory Spreads Options – ‘Return on Risk’ on Steroids!
  • Earnings Report DefinitionEarnings Report Definition

Filed Under: OPTION SPREAD TRADING Tagged With: bull call spreads action guide, bull call spreads action steps, steps for doing a bull call spread

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Search for Anything Here

Main Pages

  • Home
  • Options Basics
  • Covered Calls Options
  • Advanced Strategies
  • Option Spread Trading
  • Stock Option Trading
  • Index Options
  • Stock Chart Analysis
  • Forex Options Trading
  • Options Trading Software
  • Option Trading Systems
  • Commodity Futures Options
  • Options Broker Reviews
  • Glossary of Options Trading Terms
  • Financial Disclosure

Latest Articles

  • Investing Basics – Diversify Your Portfolio to Make Money
  • Want Trading Success? Avoid These Four Trading Mistakes
  • Technical Analysis of Stock Charts
  • The Calendar Straddle Option Strategy
  • Candlestick Chart Patterns Explained
  • Bottom Fishing Stocks Using Inflated Option Prices
  • Bottom Fishing Stock Strategy – Example
  • Comparing the Bear Call Calendar Spread with the Traditional Bear Call Spread
  • Is Binary Options a Scam if you Have a System?
  • Call Calendar Spread Example
  • Options Trading Education and Training
  • The Call Calendar Spread Explained
  • The Three Legged Box Options Trade
  • Near Riskless Trading Strategies
  • Is Binary Options a Scam? Read This and Decide
  • Gold ETF Investing – 10 Facts You Should Know
  • How to Profit Like a Pro Trader
  • Earnings Report Definition
  • Jamie McIntyre and the 21st Century Academy
  • You Can! Be a Successful Options Trader


options trading pro system

Save

Home   |   Site Map   |   Privacy Policy   |   Terms of Use   |   Amazon Affiliate   
Copyright © 2002- Option Trading Fortune. ALL RIGHTS RESERVED.

Page copy protected against web site content infringement by Copyscape


DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.