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Bull Call Spread :
A bull call spread consists of one long call with a lower strike price and one short call with a higher strike price. Both calls have the same underlying stock and the same expiration date. A bull call spread is established for a net debit (or net cost) and profits as the underlying stock rises in price.
the bull call spread is one the most popular one. The strategy comes handy when you have a moderately bullish view on the stock/index.
The bull call spread is a two leg spread strategy traditionally involving ATM and OTM options. However you can create the bull call spread using other strikes as well.
To implement the bull call spread -
Buy 1 ATM call option (leg 1)
Sell 1 OTM call option (leg 2)
When you do this ensure -
All strikes belong to the same underlying
Belong to the same expiry series
Each leg involves the same number of options
For example -
Date - 8th December 2022
Outlook - Moderately bullish (expect the market to go higher but the expiry around the corner could limit the upside)
Nifty Spot - 18609
ATM - 18650 CE, premium - Rs.110/-
OTM - 18750CE, premium - Rs.65/-
Bull Call Spread, trade set up -
1) Buy 18650 CE by paying 110 towards the premium. Since money is going out of my account this is a debit transaction
2) Sell 18750 CE and receive 65 as premium. Since I receive money, this is a credit transaction
3) The net cash flow is the difference between the debit and credit i.e 110 - 65 = 45.
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’.
After we initiate the trade, the market can move in any direction and expiry at any level. Therefore let us take up a few scenarios to get a sense of what would happen to the bull call spread for different levels of expiry.
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Disclaimer: This video is only for educational purpose.
Trainer Mr. Rishi Rai is a Chartered Accountant by profession, Investor, Equity Research Analyst & Investment Adviser, one of the aspiring finances and business coach. We are SEBI Registered INH000010423
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