What is Bull Spread? Definition of Bull Spread, Bull Spread Meaning - The Economic Times (2024)

FAQs

What is Bull Spread? Definition of Bull Spread, Bull Spread Meaning - The Economic Times? ›

Bull spreads involve simultaneously buying and selling options with the same expiration date on the same asset, but at different strike prices. Bull spreads achieve maximum profit if the underlying asset closes at or above the higher strike price.

However, the bull put spread is designed to benefit from a stock's rise. If the stock trades above the strike at expiry, the put option expires worthless, because no one would sell the stock at a strike lower than the market price. As a result, the investor who bought the put loses the value of the premium they paid.

Once your position is initiated, you should monitor it closely as you might need to take action before the contracts expire. The goal is to have both legs (each side of the spread—the buy side and the sell side) expire worthless to earn the maximum profit potential.

For example, if a bull put credit spread is opened with a $50 short put and a $45 long put, and the underlying stock price is below $45 at expiration, the broker will automatically buy shares at $50 and sell shares at $45.

The “bull call spread” strategy has other names. It is also known as a “long call spread” and as a “debit call spread.” The term “bull” refers to the fact that the strategy profits with bullish, or rising, stock prices.

The Break Even Price of a Bull Call Spread

The break-even price is the strike price of the call that was purchased plus the net premium that was paid. Based on this example, it would be $50, which is the strike price of the bought call, plus $2, which is the net premium paid. This equals to $52.

Spreads that expire in-the-money (ITM) will automatically exercise. Generally, options are auto-exercised/assigned if the option is ITM by $0.01 or more. Assuming your spread expires ITM completely, your short leg will be assigned, and your long leg will be exercised.

The probability of making money is 67% because Bull Put Spread will be profitable even if the underlying assets holds steady or rise. While, Bull Call Spread has probability of only 33% because it will be profitable only when the underlying assets rise.

Ideal scenario to execute bull call spread is when we are expecting gradual rise in price till the sold strike price, then we can earn premium in buy call and we can have theta benefit in sold call option too.

This maximum loss is the difference between the strike prices on the two options, minus the amount you were credited when the position was established.

What is the advantage of bull spread? ›

Advantages of a Bull Call Spread

Risk is limited to the net premium paid for the position. There is no risk of runaway losses unless the trader closes the long call position - leaving the short call position open - and the security subsequently rises.

Bear Vertical Put Spreads

The Bear Put Spread may allow an investor to profit from downward movements in the underlying security. It uses exactly the opposite structure of the Bull Vertical Put Spread and requires the investor to buy a high-strike put and sell a low-strike put (with a lower premium).

A bull call spread involves buying a lower strike call and selling a higher strike call: Buy a lower $60 strike call. This gives you the right to buy stock at the strike price. Sell a higher $65 strike call.

A bull spread consists of a buy leg and a sell leg of different strikes for the same expiration and same underlying contract. This strategy will pay off in a rising market, also known as a bull market, that is why it is referred to as a bull spread.

In a bull call spread, the options trader buys a call option for certain security and sells another call with a higher strike price. The most aggressive bull spreads are those where both calls are initially out-of-the-money because OTM calls tend to be cheaper (and riskier) than in-the-money calls.

A Bull Call Spread strategy works well when you're Bullish of the market but expect the underlying to gain mildly in near future. The bear call spread options strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.

The sad fact is that the vast majority of new traders will drop off having lost a significant proportion of their capital, and there are a number of key reasons why spread bettors lose that rear their heads time and time again.

MAXIMUM LOSS

The disadvantage is that the premium received is smaller, the higher the short call's strike price. It is interesting to compare this strategy to the bull put spread. The profit/loss payoff profiles are exactly the same, once adjusted for the net cost to carry.