BULL CALL SPREAD
Bull Call Spread as the name suggests, is made by combininga, Bull i.e., the market is bullish and Call Spread is made by combining two call options, in which the “In the money” call option or “At the money” call option is bought and the “Out the money” call option is sold. Which is called “Bull call spread”
Why do this in bull call spread and what is the benefit?
(The “in the money” option is bought and “out the money” is sold.)
If we buy a call option and the market slights down for some reason, then its price starts decreasing rapidly, or the target we thought we had achieved today is not achieved, 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 the “out-of-money” option.
Advantages of Bull Call Spread:
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Limited Risk: Your maximum loss is capped at the net premium paid.
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Lower Cost: It's cheaper than just buying a call option out of the money.
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Flexibility: You can adjust the strike prices to match your risk tolerance.
Disadvantages of Bull Call Spread:
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Limited Profit: Your gains are capped at the difference between strike prices minus the net premium paid.
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Requires More Capital: You need enough money to buy the lower strike call option.
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Time Decay: Both options lose value as the expiration date.
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.
In Live market: If I feel the market is going to go up from here or may go up, if not today then tomorrow, I will buy the NIFTY 24650 CE option at ₹54, 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 NIFTY24650CE call option 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” call option. We have to sell the 24750CE option at ₹27. Even if, I suffer a small loss, I will get the benefit from 24750CE.
If there is more growth in Nifty, thenthe 24650CE option will see more growth, due to which I will remain in profit, but if there is a loss, then the 24750CE 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 stoploss for creating a “BULL CALL SPREAD” position and how much money will be required?
(PAID PREMIUM) BUY POSITION = PREMIUM PRICE OF 24650CE ₹54
(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 24750CE ₹27
TOTAL PREMIUM = 54-27= 27 (MAXIMUM LOSS POINT)
FOR-PROFIT CALCULATION
STRIKE DIFFERENCE = 24750(SOLD) - 24650(BOUGHT) = 100
OPTION PREMIUM DIFFERENCE = 54-27= 27
MAXIMUM PROFIT POINT = 100-27= 73
Finally, the Max profit is 73 points and the max loss is 27 points.
Situation-1 If Nifty closes above 24750 at expiry, there will be a maximum profit of ₹73 points, but if Nifty closes below 27650, there will be a maximum loss of ₹27 points. (as per the above calculation).
Situation-2 If Nifty closes at 24650, there will be a complete loss of 24650CE at ₹54 and a profit of ₹27 at 24750CE. Due to this there will be a maximum loss of only 27 points. But if Nifty closes at 24700, then the price will be ₹50 of NIFTY 24650CE, that we have bought on 24650 will remain the same, but the price of the call option that we have sold 24750 will become 0, so from there we will get 27 points.
In a bull call spread, both the profit and loss are predictable.
Capital required for bull call spread:
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 as per lot size also. Current lot size NIFTY 25, BANKNIFTY 15, FINNIFTY 40, SENSEX 10.