What is the Bull Call Spread Strategy?

The Bull Call Spread strategy is aimed at traders who are reasonably bullish on stocks or indexes and expect higher underlying asset prices. Suppose the stocks analysed have been on a downtrend for some time. They have been recorded at a low of 52 weeks and may be out of this support. However, inventories are still on a downtrend, so you cannot be completely sure if they will reverse. The stock is reasonably bullish in these situations, and you can implement a bull call spread strategy. This strategy involves buying a Call Option and selling a Call Option. It comes with limited risks and rewards.

The Bull Call Spread Strategy is one of the simplest option strategies that options traders can use when trading options. Spread strategies are multi-leg strategies that include more than two options. A multi-leg strategy has two or more options trading.

The Bull Call Spread Strategy includes buying ITM call options and selling OTM call options. For example, if NIFTY is expected to rise moderately shortly, you can buy NIFTY call options at ITM and sell Nifty call options at OTM. If you exercise both options, you will make huge profits, and if you do not exercise both options, you will suffer huge losses.

Spread strategies such as "Bull Call Spreads" are best implemented when the stock/index view is "medium" and not truly "aggressive". For example, the outlook for a particular stock can be "slightly bullish" or "slightly bearish."

The following outlines some of the typical scenarios where the outlook can be "slightly optimistic."

1. Basic Outlook

Reliance Industries will report quarterly financial results for the third quarter. Management's second-quarter quarterly guidance shows that third-quarter results are expected to be better than last year's second and third quarters. However, you do not know how many basis points will improve the results.

Against this background, stock prices are expected to react positively to earnings announcements. However, the guidance was set in the second quarter, so the market may have somehow priced the news. This can lead to a rise in stock prices, but you can believe that the potential for a rise is limited.

2. Technical Outlook

The stocks you are following have been on a downtrend for some time, with a 52-week low, testing the 200-day moving average and close to multi-year support. With all this in mind, stock prices are likely to recover. But, as it is said, they are not completely optimistic, and stocks are still on a downtrend.

3. Quantitative Perspective

Equities are traded consistently over one standard deviation (+ 1 SD and -1 SD) in both directions and show consistent mean reversion behaviour. However, the stock price plummeted, resulting in a two-standard deviation. There is no fundamental reason for the stock price to fall, so there is a good chance that the stock price will return to the average. This makes the stock bullish, but the fact that it may spend more time near the second SD before returning to the average limits the bullish view of the stock.

The point here is that your point of view can evolve from any theory (basic, technical, or quantitative), and you may find yourself in a "moderately bullish" position. In this situation, use a Bull Call spread strategy that allows you to set optional positions in the following ways:

• You protect yourself (in case you find yourself wrong)

• The amount of profit you earn is also predefined (there is a limit)

• In exchange (to limit your profits), you can enter the market at a lower cost

Policy Note

Of all spread strategies, bull call spreads are one of the most popular. This strategy is useful if you have a reasonably optimistic view of stocks/indices. Bull Call spreads have traditionally been a two-legged spread strategy that includes buying one lot of ATM calls and Selling one lot of OTM call options. However, you can create bull call spreads on other strikes. How does it work?

This strategy means buying one lot of ATM calls and Selling one lot of OTM call options. When buying or selling a call option, it should be noted that both are from the same expiration series and must contain the same number of options.

You must consider the following points:

• The break-even point is where there is no loss or profit. The break-even point for bull call spreads is Lower Strike + NetDebit.

• This strategy limits losses

• This strategy limits profits.

To implement the buy one lot ATM call and sell one lot OTM call spread –

• Purchase 1 ATM call option (leg 1)

• Selling 1 OTM call option (leg 2)

If you do this, make sure that:

1. All strikes belong to the same foundation

2. Belong to the same expiration date series

3. Each leg has an equal amount of options

When to Use the Bull Call Spread Strategy?

The Bull Call spread strategy works well when the market is bullish, but the underlying assets are expected to rise slightly shortly.

For example:

You are investing in Nifty, and the market is bullish, trading at INR 9,500, and the price can increase. You can now benefit from using the strategy by calling a strike price of INR 9300 at a premium of INR 150 and selling a call option with a price of INR 9700 at a premium of INR 40. The net premium you have paid so far is INR 150-40=110, the maximum loss you will bear.

The Bull Call spread strategy talks about the following three things:

• If the Call Option had been purchased, the break-even point would have been 9,470 instead of 9410.

• The premium is reduced from 150 to 110

• The extent of the loss also has been reduced. From the initial premium payable, it has now been greatly reduced to minimise the risk of loss.

Let us Consider the following premium strategy table to better understand the Bull Call Spread:

In the above example, the loss is restricted to 50 and the profit is capped at 30. Thus, we can say that:

Spread = Difference between the higher and lower strike price

Benefits of the Bull Call Spread Strategy

• Investors can recognise limited profits from upstream stick prices

• Implementing the Bull Call Spread strategy is cheaper than purchasing your call options

• The distribution of bullish calls limits the maximum loss that owns inventory for the net expenses

• It restricts their losses directly to net premium or option

• Bull Call Strategy also occurs with priced options. However, don't forget that this strategy is not suitable for each market.

• This strategy is most active in the market, where the price of the underlying asset increases slowly.

Disadvantages of the Bull Call Spread Strategy

• Investors will expire all the benefits above the stock on sales options sales.

• Profits are restricted in consideration of net costs for the two call options.

Conclusion

The Bull Call Spread Strategy is aimed at traders who are reasonably bullish on stocks or indexes and expect higher underlying asset prices. If you purchase and sell call options, both are the same and include the same number of options. The Bull Call Spread Strategy comes with a Limited Risk and limits its losses to the net premium or rate paid for the option.