Bull Spread
A bull spread is an optimistic options strategy designed to profit from a moderate rise in the price of a security or asset. A variety of vertical spread, a bull spread involves the simultaneous purchase and sale of either call options or put options with different strike prices but with the same underlying asset and expiration date. Whether a put or a call, the option with the lower strike price is bought and the one with the higher strike price is sold.A bull call spread is also called a debit call spread because the trade generates a net debt to the account when it is opened. The option purchased costs more than the option sold.
Bull Spread
Definition: A bull spread is an optimistic options strategy aimed at profiting from a moderate rise in the price of a security or asset. It is a type of vertical spread that involves simultaneously buying and selling call or put options with different strike prices but the same underlying asset and expiration date. Whether using call or put options, the strategy involves buying the option with the lower strike price and selling the option with the higher strike price. A bull call spread is also known as a debit call spread because the trade results in a net debit to the account when opened. The cost of the purchased option is higher than the sold option.
Origin
The bull spread strategy can be traced back to the early development of the options market. As options trading became more popular, investors began exploring various strategies to profit under different market conditions. The bull spread, being a relatively conservative strategy, gradually gained acceptance and application among investors.
Categories and Characteristics
Bull spreads are mainly divided into two categories: bull call spreads and bull put spreads.
- Bull Call Spread: Involves buying a call option with a lower strike price and selling a call option with a higher strike price. Suitable for scenarios where the asset price is expected to rise moderately.
- Bull Put Spread: Involves buying a put option with a lower strike price and selling a put option with a higher strike price. Suitable for scenarios where the asset price is expected to fall moderately.
Characteristics: The risk and reward of a bull spread strategy are both limited. The maximum loss is the net cost of the purchased and sold options, while the maximum gain is the difference between the strike prices minus the net cost.
Specific Cases
Case 1: Suppose an investor expects a stock price to rise from $50 to $55. They can buy a call option with a strike price of $50 and sell a call option with a strike price of $55. If the stock price indeed rises to $55 at expiration, the investor will achieve the maximum profit.
Case 2: Another investor expects a stock price to fall from $60 to $55. They can buy a put option with a strike price of $60 and sell a put option with a strike price of $55. If the stock price indeed falls to $55 at expiration, the investor will achieve the maximum profit.
Common Questions
1. What is the maximum risk of a bull spread?
The maximum risk is the net cost of the purchased and sold options.
2. Under what market conditions is a bull spread suitable?
It is suitable for market conditions where the asset price is expected to rise or fall moderately.
3. How does a bull spread differ from other options strategies?
The risk and reward of a bull spread are limited, whereas some other options strategies may have higher risks and potential rewards.
