Bull Call Spread Payoff Formula

options trading

The long call in a bull call spread has no risk of early assignment. As you can see, the price of the stock has to rise to produce profits. To achieve it, you better keep an eye on its revenue growth and its EPS growth. The short call will have a higher premium to be collected, and the long call will have a lower premium to be paid, creating an initial profit called net credit. For more information on long calls and bullish spreads, please visit Understanding Options on Schwab.com.


A bull call debit spread is made up of a long call option with a short call option sold at a higher strike price. The maximum profit potential is the spread width minus the premium paid. 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. The losses and gains from the bull call spread are limited due to the lower and upper strike prices.

What Is Bull Call Spread Strategy?

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. Now, let’s add these 2 positions and take into account the net outflow of $2 to come to a realistic payoff function chart of the Bull Call Spread. The formulas explained below are precisely those used by our options spread calculator. You want the stock to be at or above strike B at expiration, but not so far that you’re disappointed you didn’t simply buy a call on the underlying stock. But look on the bright side if that does happen — you played it smart and made a profit, and that’s always a good thing.


The maximum return in the bull call spread is achieved when the stock price trades at, or above the short call strike price. Traders profit from seeing the stock price advance in their expected direction. A Bull Put Spread is created by selling a put option and buying another put option of the same underlying asset and expiration date but a lower strike price. The bull vertical spreads are created when the trader expects the market to rise. Bear vertical spreads benefit when the underlying security falls.

Therefore, the https://forex-world.net/’s maximum profit and maximum losses are $4 and $1, respectively. Second, you have to SELL or SHORT an OTM call option on IBM, so let that be of a strike price of $33. It is a bearish strategy meaning you will profit from a stock fall in price. Here you will have to sell a call option with a lower strike price and to buy a call option with a higher strike price.

But, the $1 of profit minus $1.80 premium paid is less than the max loss of $$1.80 paid, so in this scenario, the trader has loss of only $0.80 per contract compared to max loss of $1.80. What we are looking at here is the payoff graph for a bull call spread option strategy. Moneyness refers to the relative position of the underlying asset’s last price to the strike price. When a call option’s Moneyness is negative, the underlying last price is less than the strike price; when positive, the underlying last price is greater than the strike price. When a put option’s Moneyness is negative, the underlying last price is greater than the strike price; when positive, the underlying last price is less than the strike price.

Bull Call Debit Spreads Screener

To illustrate, the call option strike price sold is $55.00 and the call option strike price purchased is $52.50; therefore, the difference is $250 [($55.00 – $52.50) x 100 shares/contract]. Rolling a vertical spread means closing your current spread position and moving it to a further-dated expiration or to different strikes. This is a way of managing winning or losing positions if you’ve had a change of heart about how you think the market will be moving. The two legs of the position determine whether it’s a credit or debit spread – more specifically, the value difference between these two options. If the stock price decreases so that the value of the credit spread decreases over time, the initial credit received upfront is kept as profit at execution of the trade. Notice also that profits occur much before the expiration breakeven price and above 120, the profits are not the maximum profit.

  • Simultaneously, sell a call option at a higher strike price that has the same expiration date as the first call option, and collect the premium.
  • One of the biggest benefits of this bull call spread options strategy is that your losses are limited and known before the trade is executed.
  • This strategy breaks even at expiration if the stock price is above the lower strike by the amount of the initial outlay .
  • For example, a closing stock price at expiration of $52.75 is between the lower strike price of $52.00 and the breakeven of $52.92 and is therefore going to be a partial loss.

Under the no-arbitrage assumption, the net https://forexarticles.net/ paid out to acquire this position should be equal to the present value of the payoff. A bullish call spread option, also known as a bull call spread option, is a trading strategy that aims to capitalize in an increase in the price of a given market or asset. The bull call spread option strategy consists of two call options that create a range that outlines a lower strike point and an upper strike point. The bullish call spread strategy helps to cap loss if the price of an asset drops, however, the strategy also caps the amount of potential gains in case of a price increase. Bullish investors often use this when trading futures, bonds, and equities.

Bull Call Spread Profit/Loss Potential at Expiration

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The premium paid on the purchase and received on the sale results in a spread credit of $4. First, determine the bull put spread’s maximum profit and maximum loss. In the above graph, the blue line represents the payoff from the strategy, which is a range. The maximum loss from the strategy is the net spread.In the above graph, the blue line represents the payoff from the strategy, which is a range. It’s opening two of the same options type positions – one long and one short – on the same underlying asset, with an identical expiration, but different strike prices. You’d incur the maximum loss, which is the debit paid for the trade upfront, if the underlying price is at or below the long call strike price.

Implied Volatility

Webull https://bigbostrade.com/ LLC is a member of the Financial Industry Regulatory Authority , Securities Investor Protection Corporation , The New York Stock Exchange , NASDAQ and Cboe EDGX Exchange, Inc . You can download the payoff sheet by clicking on the download button at the bottom of this blog. You just need to enter the values for your option in this sheet to get a representation of your payoff. Our price to sales ratio calculator helps you to calculate the P/S ratio, which is an indicator of the company’s attractiveness. Money market account calculator is a tool that finds the return you get from this type of bank account.

In this article, we’ll compare two bullish options strategies in order to assist you with the decision-making process. If only the Call Option was purchased, the premium paid would have been Rs 170. Profit from a gain in the underlying stock’s price without the up-front capital outlay and downside risk of outright stock ownership.

This is to account for the potential execution of trade or assignment. So, you decide to go long on it, employing the bull call spread strategy. You should now be intimately familiar with the bull call spread option payoff graph. The profit for the trade will be equal to the width of the strikes minus premium paid. Now let’s get into building a bull call spread options trade to take advantage of this opportunity. While horizontal spreads are constructed mainly to capitalise on a non-directional trade, vertical spreads are created to benefit from a directional move.

The value of the option will decay as time passes, and is sensitive to changes in volatility. Your maximum loss is capped at the price you pay for the option. Trader #1 decides to purchase a long call while Trader #2 decides to establish a bull call spread. Let’s start by evaluating Trader #1’s long call strategy using some common strategy attributes and options Greeks, such as Delta, Theta and Vega. Then we will perform the same assessment on Trader #2’s bull call spread. Finally, we will put these two strategies side by side and review their respective benefits and trade-offs.

Once you purchase a long call or put, you can expect that your option is going to lose a little bit of value every day until expiration, all other things being equal. An estimate of how much might be lost is expressed in the “Greek” measure known as Theta. In the first 30 days of the trade, the stock price stagnates around the breakeven price of the long call spread.

The bull call spread is a debit spread as the difference between the sale and purchase of the two options results in a net debit. For a bullish spread position that is entered with a net credit, see bull put spread. An options trader believes that XYZ stock trading at $42 is going to rally soon and enters a bull call spread by buying a JUL 40 call for $300 and writing a JUL 45 call for $100. The net investment required to put on the spread is a debit of $200.

The worst that can happen is for the stock to be below the lower strike price at expiration. In that case, both call options expire worthless, and the loss incurred is simply the initial outlay for the position . Time decay, or theta, works against the bull call debit spread. The time value of the long option contract decreases exponentially every day. Ideally, a large move up in the underlying stock price occurs quickly, and an investor can capitalize on all the remaining extrinsic time value by exiting the position.