Bull Call Debit Spread Profit Loss Graph
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Sell an At or In the money call and buy a lower strike call. Since the long call is deeper In the Money, the investor will pay a debit. |
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This is a bullish strategy as you expect the stock to remain above the short (sold) call strike price. |
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In order to realize a profit, an investor must close both legs at or near expiration. |
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The maximum risk is the net debit. |
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BUY an ITM (In the Money) CALL. |
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Sell a Call one or more strike prices above #1 Call in the same month. |
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The net investment is the net debit (difference in premiums). |
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The maximum risk during bull call spreads is the net debit (difference in premiums). |
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The maximum profit is realized if the stock is anywhere above the higher strike price. Maximum profit is equal to the difference in the strike prices minus the net debit. |
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The break even point in bull call spreads is the lower strike price (#1) plus the net debit. A profit is realized at any price above the break even point. |
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Maximum profit is made when the stock price rises above the highest strike price (#2 CALL). |
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Profit is achieved when both legs of the position are liquidated prior to expiration. |
% Return = | Maximum profit / Net Investment |
% Return = | (Difference in strike prices - Net Debit) / Net Debit |
Net Debit = | Premium on Bought Call - Premium on Sold Call |
Example: | Stock XYZ at $67.93 per share. |
Buy the SEP 60 Call for $9.20 | |
Write (Sell) the SEP 65 Call for $5.30 | |
% Return = | (Difference in strikes - Net Debit) / Net Debit |
% Return = | (65 - 60 - (9.20 - 5.30)) / (9.20 - 5.30) = 1.10 / 3.90 = 28.2% |
Max. Risk = | Net Debit = $9.20 - $5.30 = $3.90, if stock is < $60 |
Max. Profit = | Difference in strikes - Net Debit = 5.00 - 3.90 = 1.10, if stock is > $65 |
Break Even = | Lower Strike + Net Debit = $60.00 + $3.90 = $63.90 |
XYZ at exp. | Long 60 CALL | Short 65 CALL | Spread Value | Spread Cost | Net |
$70.00 | $10,000 | $5,000 | $5,000 | -$3,900 | +$1,100 |
$65.00 | $5,000 | 0 | $5,000 | -$3,900 | +$1,100 |
$63.90 | $3,900 | 0 | $3,900 | -$3,900 | 0 |
$60.00 | 0 | 0 | 0 | -$3,900 | -$3,900 |
$55.00 | 0 | 0 | 0 | -$3,900 | -$3,900 |
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The Bull Call strategy is a BULLISH strategy, the profit can only be realized when the stock price is above the break even point. |
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If the stock goes very high gains are limited to the difference in strikes minus the debit. |
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Losses are limited to the net debit. |
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No stock is actually owned. (uncovered position). |
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In the money (ITM) calls offer low break even points, but more limited profits. |
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Out of the money calls offer larger profits, but have higher break even points, which require a rise in the price of the stock to realize gains. |
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If you like the risk/reward of the Debit Spread strategy but are bearish: Bear Put Debit Spreads Help |
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If you are Bullish on the stock but prefer credit spreads: Bull Put Credit Spreads Help |
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For more information on the Parity Strategy to Bull Call Debit spreads: Parity Trading - Option Spreads and Parity Option Trades Revisited |