How to trade bull put spreads and bull call spreads explained Leave a comment

On to part 3 next where we pull the positions we’ve looked at so far together to construct iron butterflies and iron condors. This example will be left in the downloadable version of the sheet under the name ‘Put Spread’. This example will be left in the downloadable version of the sheet under the name ‘Call Spread’. In this case, we sell the $80 for $1 and buy the $85 for $0.15, receiving a net credit of $0.85. To have the underlying price move lower in order to generate a profit.

In a nutshell, when the same number of call options are bought and sold at the same time its a call spread. Your profit is limited, but on the plus side, your risk is minimal. What’s more, call spreads can be used to make money from a bull, bear or neutral market! As the underlying security’s price starts growing, so does the bull call spread’s profitability. The profit grows to the level of the short call option’s strike price.

Quantitative Perspective – The stock is consistently trading between the 1st standard deviation both ways (+1 SD & -1 SD), exhibiting a consistent mean reverting behavior. However there has been a sudden decline in the stock price, so much so that the stock price is now at the 2nd standard deviation. There is no fundamental reason backing the stock price decline, hence there is a good chance that the stock price could revert to mean.

The basic difference between the call spread vs put spread is how the two strategies eventually work. The spread loses money when the price of the stock falls below purchased put’s strike price or rises above purchased call’s strike price. In a butterfly spread strategy, there are three strike prices. They, therefore, involve buying and selling options with different expiry dates, but the same strike price . A calendar spread is a good example or horizontal call or put spread . It involves buying an option and selling a call option with a higher strike price; an example of a debit spread where there is a net outlay of funds to put on the trade.

Apple Stock is trading at $45, Iron Condor would be – buying 35 Put at $50, writing 40 Put at $100, writing 50 Call at $100, and buying 55 Call at $50. If the expiration value is the same, all long and short options would be useless and maximum profit would be realized. If it falls to $35 or rises to $55, only the 40 Long Put would be useful and the maximum loss of $400 would be realized. A put spread is another options trading strategy that involves buying one put option at a certain strike price and selling another put option with a different strike price. However, both put options must have the same expiry dates. To profit from changes in implied volatility and from time decay, use a calendar call spread.

Here are some key differences between a call spread and a put spread. The intrinsic value of both 7700 PE and 7900 PE would be 0, hence both the potions would expire worthless. The 7700 PE will not have any intrinsic value, hence we will lose all the premium that we have paid i.e Rs.72.

Theta is your best friend for bear calls and bull put strategies

Do note, this is also the net debit of the overall strategy. Fundamental perspective – Reliance Industries is expected to make its Q3 quarterly results announcement. From the management’s Q2 quarterly guidance you know that the Q3 results are expected to be better than both Q2 and Q3 of last year. However you do not know by how many basis points the results will be better. Proprietary technical analysis on key oil & gas markets. Pay 20% upfront margin of the transaction value to trade in cash market segment.

call spread and put spread

This strategy is a net credit meaning you will receive premium and be long theta. A call spread or bull call spread, long call spread, or vertical bull call spread is an options strategy that involves buying a call and simultaneously selling a call. This strategy is meant for those that want to capture gains in a stock that is trending upwards but not rapidly ascending upwards. Take a new example and assume that Apple stock is currently around $175. Straddle would be a good strategy if the trader thinks that a huge move would be made on either side.

Greeks of position

Having said that, every options trader should know what spreads are and how to make money from the different strategies. A practical example of how to determine profit from a bull spread is provided in the “Bull Put Spread Example” and the “Bull Call Spread Example” sections of this article. If you want to estimate the maximum profit, please refer to the table above.

Epsilon Options is here to help you learn the skills you’ll need to become a … So called because of options with different expiries being displayed horizontally on an options chain quote board. So, again, with IBM at $162 we might sell the $160 Nov call and purchase the $165 Nov call .

Similarly on the upper side, the profit will be limited to Rs.13, irrespective of how high the price of SBI goes. That is because, above the price of Rs.270, whatever you gain on the 250 call option, you lose on the 270 call option. By converting the call option into a bull call spread the break-even point of the option is dropping by Rs.5 from Rs.262 to Rs.257. Similar to call spreads, a trader can take a bullish or bearish take on put options. Put spreads are less risky options than trading simple options on an underlying asset.

The current price is $110 and I am trading the $111/$115 spread which means I am buying the $111 call and selling the $115 call. The breakeven price is at $112.50 which means if AMD stock closes between $110 and $112.50 at expiration, I lose anything between $0 and up to the full $150 premium I paid. Choosing your strike prices for your call and put spread option strategies is very important. The strikes you choose for the two option contracts for your strategy will determine how much risk reward you take on. I’ll explain this as best as I can with the examples I’ve already used with AMD. For starters, they’re first created by buying and selling options on the same underlying asset but at different strike prices.

  • Use the Profit + Loss Calculator to establish break-even points, evaluate how your strategy might change as expiration approaches, and analyze the Option Greeks.
  • However, as long as it is above that level, it doesn’t matter how much it grows with.
  • The premium the trader pays is for the purchase of the put option.
  • Also, a trader will make a profit if the underlying asset moves favorably.

So called because options with the same expiry date are quoted on an options chain quote board vertically. You believe that the underlying will drop sharply in price, hence sold the underlying. In this case, the call spread will offer you protection against a small move up. Thus, if the stock expires at $32 and above, the investor would have made money. Most often, the strikes of the spread are on the same side of the underlying (i.e. both higher, or both lower). Not to mention our Facebook community is over 30,00 members.

Key Differences in a Call Spread Vs Put Spread

The price of AMD moves to $125 at expiration, you collect a profit on long call option and a loss on the short call option. Implied volatility is one of the most important concepts in options trading. Introduction Options are highly versatile financial instruments.

If the XYZ stock hits $211, however, the value of your $200 call option would rise by $10, while the value of the $210 call would remain $1. Any additional profits in the $200 call are basically forfeited. Your total profit on both call options would equal $9 ($10 gain – $1 net cost) per contract. Generally speaking in a bull call spread there is always a ‘net debit’, hence the bull call spread is also called referred to as a ‘debit bull spread’. A different pair of strike prices might work, provided that the short call strike is above the long call’s. Put spreads are cheaper to put on, and have a lower risk/reward profile than buying a call option.

call spread and put spread

This photo summarizes the differences between all 4 strategies with a side by side comparison of their payoff diagrams. As a reference, I hadnever soldoptions before getting into this strategy. I used to always buy call and put options, losing more often than not. The extrinsic value of a stock option contract is the portion of the option’s worth that has been assigned to factors other than … Investors that are looking to make longer-term bets may use LEAP Options.

You can access my options trading spreadsheet and use it for yourself to keep track of all your call spread and put spread trades. You know exactly how much you can you lose and how much you can win. There are no opportunity costs either as your option will expire when it expires, and you’ll know exactly the final result of your trade. You’re risking something in hopes of winning something else. You can’t have profits without risk in the world of options trading. Because you buy the call option at a lower strike, this ensures you minimize your downside risk.

Bear Call Spread Vs Bear Put Spread Options Trading Strategy Comparison

There is nothing like ideal RRR, it really depends on the trader’s risk appetite. For me personally I look for 1.2 RRR for Bull Call call spread and put spread Spread and for Bull Put spread I guess around 1.0 should be ok. Thanks for your articles on Bull Call and Put spread strategy.

The most you can lose is the cost that you incur when applying the spread. This makes this an attractive strategy to use if you do have some concerns that your neutral forecast could be wrong and the security may actually move in price significantly. If the stock moves below $45, both options will be in the money, and you’ll make a profit. Your net profit will be the difference of premiums plus the difference of exercised put options.

Therefore let us take up a few scenarios to get a sense of what would happen to the bull put spread for different levels of expiry. You simply sell near term calls to ride out the long term call for a discount. When applying the strategy, it is worth noting that the investor should be confident that the market is about to rise. Even if the losses are capped, your portfolio can quickly wipe out a big part of its value, when trading in large quantities. A long call spread increases in value the closer it gets to its expiration point. The ultimate goal is for the stock to be at or above point B at expiration.

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