Rather than a cost of $460 per contract, selling the 115 call brings in premium. Since the cost is also your maximum risk with the bull call spread, you’ve effectively reduced your risk on Starbucks stock. It contains two calls with the same expiration but different strikes. The strike price of the short call is higher than the strike of thelong call, which means this strategy will always require an initial outlay .

An expensive premium might make a call option not worth buying since the stock’s price would have to move significantly higher to offset the premium paid. Called the break-even point , this is the price equal to the strike price plus the premium fee. The premium received by selling the call option partially offsets the premium the investor paid for buying the call. In practice, investor debt is the net difference between the two call options, which is the cost of the strategy.

2 – Strategy notes

To hedge the bull call spread, purchase a bear put debit spread at the same strike price and expiration as the bull call spread. This would create a long butterfly and allow the position to profit if the underlying price continues to decline. The additional debit spread will cost money and extend the break-even points. A bull call debit spread is a multi-leg, risk-defined, bullish strategy with limited profit potential. The strategy looks to take advantage of an increase in price from the underlying asset before expiration. The worst that can happen is for the stock to be below the lower strike price at expiration.

The result is that stock is purchased at the lower strike price and sold at the higher strike price and no stock position is created. The maximum risk is equal to the cost of the spread including commissions.

Bull Call Spread

Risk-reward RatioThe risk-reward ratio is the measure used by the investors during the trading for knowing their potential loss to the potential profit. Hence it is used by the traders for effectively managing their risk and capital during the trading process.

One can enter a more aggressive bull spread position by widening the difference between the strike price of the two call options. However, this will also mean that the stock price must move upwards by a greater degree for the trader to realise the maximum profit. Bull call debit spreads have a finite amount of time to be profitable and have multiple factors https://www.bigshotrading.info/ working against their success. If the underlying stock does not move far enough, fast enough, or volatility decreases, the spread will lose value rapidly and result in a loss. Bull call spreads can be adjusted like most options strategies but will almost always come at more cost and, therefore, add risk to the trade and extend the break-even point.

Impact of change in volatility

It’s important to note that purchasing out-of-the-money call spreads is a low probability trade because the breakeven price is above the stock price at entry. Additionally, the profit potential is greater than the loss potential. Since the long call is in-the-money at expiration, the trader would end up with +100 shares of stock if they did not sell the long call before bull call spread strategy expiration. Upon selling the long call portion of a bull call spread, it’s wise to buy back the short call. Otherwise, the trader will expose themselves to unlimited loss potential. One adjustment could be to buy back the short leg of the spread if the market is moving favorably. Although this will increase the capital risk on the trade, the total risk is still defined.