In options trading, a bull spread is a
bullish
Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated Market trends, price development in a market. This attitude is the accumulation of a variety of fundamental analysis, fundamenta ...
,
vertical spread
In options trading, a vertical spread is an options strategy involving buying and selling of multiple options of the same underlying security, same expiration date, but at different strike prices. They can be created with either all calls or all ...
options strategy
Option strategies are the simultaneous, and often mixed, buying or selling of one or more options that differ in one or more of the options' variables. Call options, simply known as Calls, give the buyer a right to buy a particular stock at that ...
that is designed to profit from a moderate rise in the price of the underlying security.
Because of
put–call parity
In financial mathematics, put–call parity defines a relationship between the price of a European call option and European put option, both with the identical strike price and expiry, namely that a portfolio of a long call option and a short pu ...
, a bull spread can be constructed using either
put option
In finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the ''underlying''), at a specified price (the ''strike''), by (or at) a s ...
s or
call option
In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an ...
s. If constructed using calls, it is a bull call spread (alternatively call debit spread). If constructed using puts, it is a bull put spread (alternatively put credit spread).
Bull call spread
A bull call spread is constructed by buying a
call option
In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an ...
with a lower strike price (K), and selling another call option with a higher strike price.
Often the call with the lower exercise price will be
at-the-money
while the call with the higher exercise price is
out-of-the-money. Both calls must have the same underlying security and expiration month. If the bull call spread is done so that both the sold and bought calls expire on the same day, it is a vertical debit call spread.
Break even point= Lower strike price+ Net premium paid
This strategy is also called a call debit spread because it causes the trader to incur a debit (spend money) up front to enter the position.
The trader will realize maximum profit on the trade if the underlying closes above the short strike on expiration.
Bull put spread
A bull put spread is constructed by selling put options with a higher strike and buying the same number of put options with a lower strike on the same underlying security with the same expiration date.
[McMillan 2012, p. 319.] The options trader employing this strategy hopes that the price of the underlying security goes up far enough that the written put options expire worthless.
If the bull put spread is done so that both the sold and bought put expire on the same day, it is a vertical credit put spread.
Break even point = upper strike price - net premium received
This strategy is also called a put credit spread because the trader will receive a credit (be paid the premium) for entering the position.
The trader will realize maximum profit if the underlying closes above the short strike on expiration.
See also
*
Ladder (option combination)
In finance, a ladder, also known as a Christmas tree, is a combination of three options of the same type (all calls or all puts) at three different strike prices. A long ladder is used by traders who expect low volatility, while a short ladder ...
Notes
References
* McMillan, L. G. (2012). ''Options as a Strategic Investment'' (5th ed.). Penguin Group.
Options (finance)
Derivatives (finance)
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