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Number of messages : 22
Points : 1782
Date of Entry : 2015-07-30
Year : 54

ma1 Bullish strategies Long Call Spread

on Thu Jul 30, 2015 9:01 pm
To build a Long Call Spread, the trader is required to buy a Call that is In-the-money (ITM) at strike price A and sell a Call that is out-of-the-money (OTM) at strike price B. By implementing this strategy, the trader minimises his risk as by selling the call at B he covers the costs of purchasing at A. The downside is that the maximum profit he could earn is capped.
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When to do it
This strategy works best when the trader thinks that the pair is bullish but he is not as sure as to simply buy a Call and wants to minimize his risks.

The set-up
Buy an ITM Call at strike price A (spot -)

  • Sell an OTM Call at strike price B (spot +)
  •  At the time of creating this strategy, the pair’s price is between A and B.

Maximum potential profit
The maximum potential profit is limited to the difference between A and B minus the premium paid.

Maximum potential loss
The maximum potential loss is limited to the premium paid.

Time impact
In the Long Call Spread, time has no significant effect as any losses suffered by time decay on the purchased
Call are equalised by profits made by time decay on the sold Call.

Best/worst case scenario
The best case scenario is at B. Anything above B will not make a difference to the profit, but if the price ends up being a lot higher than B, then the trader would have been better off if he had simply bought a Call.
The worst case scenario is at A or below. In this case, both options expire with no value and the trader only loses the premium.

Tips
By increasing the strike price above B, maximum potential profit is increased, but at the same time the premium paid is increasing and the likelihood that the higher strike price will be achieved is minimised. Generally you should only set higher strike prices if you expect high bullish spikes.

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