Bull Call Spread Strategy

Bull Call Spread Strategy

Submitted by adil on Fri, 10/17/2014 - 11:16

Here's a Great Strategy - And That Aint No Bull!

One trading strategy, that is very smart and gaining a lot of attention in the ‘Bull call spread’ strategy. This trading strategy is like a ‘double edged sword’. If the things are going in the trader’s benefit, he can earn huge sums of profits with minimum risk. On the contrary if the conditions are not in his favor, he might suffer from immense losses; that is only if he has not devised a clear strategy. Careful thought needs to be given before jumping into this trading strategy by newcomers.

Defining a Bull Call Spread

The Bull Call Strategy can be compared to Chess game. By making a few right moves, traders can earn a lot of money. Although this is a simple strategy, but the consequences of your decision can be immaculate. First of all you need to purchase the call options for your core asset. This idea can be beneficial to you if the price of the asset is expected to rise over time, till it reaches the expiry date. In the second step, you need to make the selling equal to the number of calls for the particular asset, keeping in mind the expiry date. You can earn a huge profit from the difference in two strike prices.

Reason for choosing Bull Call Spread

Like all other trading strategies, this strategy is also aimed to ensure gaining profits on the asset, you are sure will increase over time. By using Bull Call spread you are seeking to buy a number of call options and selling the same number of assets at a much higher price.  You will earn huge sums of profits if the strike price of the call options you’re selling is still lower than the current price market. An excellent example to demonstrate this is given as follows:

If the current price JKL stocks go for is $ 41. You purchase a call option with a strike price $ 43. Then you sell a call option for the same underlying asset for $ 50 with the same expiration date. Now, in our example the stock prices jump to $ 60 before the expiration date and the buyer of your call option wants to purchase the stocks at the strike price. This is where the call option you purchased for $ 43 comes in handy, because you can purchase the stocks for $ 43 instead of the current market price of $ 60. Here we see that the profit is $7 per every share sold.

A lot of profits can be earned by following this strategy, but as mentioned before you need to develop a sound understand of the underlying tips and traits. You need to very proficient with reading technical charts and analyzing all changes. This strategy is mostly used by experience traders, who are masters of this game. Before starting off with this trading strategy you must acquire yourself with the market conditions and various pricing strategies.

Bull Call Spread strategy can produce astonishing results for analytical and experienced traders, as high profits are possible with limited risks. It is not only dependent on the differnce between the strike price and entry price, but also on the number of stocks that have been purchased.  You should only jump into this trading strategy, if you have gained some experience and feel that you have very strong technical analysis skills.