BULL CALL SPREAD
Bull Call Spread as the name suggests, it's made by combining, Bull i.e. market is bullish and Call Spread is made by combining two call options, in which “in the money” option or “at the money” option is bought and “out the money” option is sold. Which is called “Bull call spread”
Why does this in a bull call spread and what is the benefit?
If we buy a call option, and for some reason, there is a slight decline in the market, then its price starts decreasing rapidly or the target we have thought is not achieved today and we wait for the next day, Then the premium price decreases due to time decay, so to save the loss due to this, we have to sell “out the money” option.
How to make Bull Call Spread?
Let us briefly understand how to create a bull call spread, for example, we will take the help of the Nifty option chain and Nifty index price.
If I feel the market is going to go up from here or may go up, if not today then tomorrow, I will buy NIFTY 20950 CE option at Rs 148, and if I feel there is a slight fall in the market, It is possible that there may not be much rise in the market tomorrow due to which NIFTY 20950 CE may not get that much profit or there may be a slight loss, then to save the loss due to this, I will go for option selling “out the money” option. We have to sell 21100CE for ₹72. Even if, I suffer a small loss, I will get the benefit from 21100CE.
If there is more growth in Nifty, then 20950 CALL option will see more growth, due to which I will remain in profit, but if there is a loss, then the 21100 CALL option will save me from the loss.
NOTE: - To create a bull call spread, first create a buying position, then create a selling position, but when exiting the position, first square off the selling position and then square off the buying position.
What will be the target and stop loss for creating a “Bull call spread” position and how much money will be required?
(PAID PREMIUM) BUY POSITION = PREMIUM PRICE OF 20950 CALL ₹148
(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 21100CALL ₹72
TOTAL PREMIUM = 148-72= 76 (MAXIMUM LOSS POINT)
STRIKE DIFFERENCE= 21100-20950 = 150-72=78 (MAXIMUM PROFIT POINT)
If Nifty closes above 21100 before expiry, there will be a maximum profit of ₹ 150 points, but if Nifty closes below 20950, there will be a maximum loss of ₹76 points.
Bull Spread Image
If Nifty closes at 20950, there will be a complete loss of ₹148 at 20950CE and a profit of ₹72 at 21100CE. Due to this, there will be a maximum loss of only 76 points. But if Nifty closes at 21100, then the price of ₹ 148 that we bought on 20950CE, will remain the same, but the price of the call option that we have sold on 21100CE will become 0, so from there we will get 76 points. We will get a profit of Rs76.
In a bull call spread, both the profit and loss are predictable. To create a bull call spread, Nifty and Fin Nifty options use a fund of 30-35K, while Bank Nifty options use a fund of 40-45K and also depend on the strike price and days left to expiry, the amount of funds used keeps increasing or decreasing.