Bull Spread Options Strategies
There are two types of Bull spread options strategies: Bull call and Bull put. These spreads purchase and sell either calls or puts simultaneously at different strike prices, with the same expiration date. In bull spreads, regardless of whether it is a call or put, it is the option that has the lowest strike price that is bought and the one with the highest strike price is sold. Bull spread strategies are generally used when the investor feels there is going to be at lease a moderate increase in the stock price.
The two Bull spreads make up the second half of what are classified as vertical spreads and are the total opposite of bear spreads (which as discussed previously are the other half of vertical spread category). Let’s go over the bull call and put spreads.
Bull Call Spread
In a bull call spread you purchase an ‘in-the-money’ (ITM) call at a strike price and sell an ‘out-the-money’ (OTM) call with a higher strike price, both sharing the same stock expiration date.
The profit is limited and defined by the difference between the two strike prices less the net cost of the call spread and is realized when the price of the stock is either at or above the higher strike price at the expiration date. Should the stock price expire below the strike price of the the lower strike price, both calls will expire as worthless.
Bull call spreads are sometimes referred to as ‘long call’ and ‘debit call’ spreads. Long calls refers to the way it profits by rising stock prices and debit call because the strategy is created for a net cost/debit.
The profit and loss chart for the bull call spread is the same as for the bull put spread, the only difference being that one uses calls and the other uses puts.
Bull Put Spread
A bull put spread is when you sell an ‘in-the-money’ short put at one strike price while buying an ‘out-the-money’ long put at a lower strike price, both with the same expiration date. The advantage of using a bull put spread is that you can make money even if the stock price goes down a little, plus your loss is protected by the premium you collect from selling the put.
In order to profit from bull put spreads, the stock price must be at or above the strike price of the short put/higher strike price at expiration. This strategy profits from time decay and rising stock prices in a neutral or rising market where the prices are expected to increase.
For both of these bull spread strategies, the maximum profit is made when the stock closes at or above the higher strike price and is generally used when at least moderate growth of the stock price is expected.
The main difference between the bull call and bull put spreads is that with the put spread you get the premium difference (profit) up front, and on the Call spread you pay the premium difference (loss) up front.
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