← Strategy LabLesson 17 · 4:08
Bull call spread
Summary
Use a bull call spread when you think XYZ will rise, and soon, but want a cheaper call: buy the $100 call at $3.45 and sell the $105 call at $1.58, paying $187 instead of $345. The most you can make is $313 at $105 or above, and the most you can lose is the $187 at $100 or below. You break even at $101.87.
Key terms
- bull call spread
- Buy a lower-strike call and sell a higher-strike call with the same expiry, paying to open, to profit from a rise.
- vertical spread
- Two options of the same kind and expiry, one bought and one sold, at different strikes.
- debit
- The net cash you pay to open a trade, $200 for this spread.
- strike width
- The gap between the two strikes of a spread, times 100 shares, which sets the most the spread can be worth: $500 here.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- bid-ask spread
- The gap between the bid and the ask, which you pay when you trade in and out.
Check yourself
Answer each question to see why the right answer is right.
1. What does the lesson's bull call spread cost in all?
2. XYZ ends at $110. What do you make?
3. Where does the spread break even?
4. XYZ ends at $90. What is your result?
5. With XYZ at $105 and nothing else changing, what does time do?
Finished the video and the quiz? .