A ONE-STOP PORTAL OF INFORMATION FOR FUTURES AND COMMODITIES TRADERS
A bull call spread is a combination of a long call
at one strike price, and a short call with a higher
strike price. Both options have the same expiration
date.
This is a bullish position which allows a
trader to establish a long market position with limited
risk and low cost.
The trader buys an
at-the-money call which he will exercise should prices
rise, as he feels they will. However, unlike someone
with an outright long position, the trader feels there
is a distinct possibility that prices will fall, so he
sells a call with a higher strike price. This lets him
collect a premium to partially offset the cost of his
long position, with a somewhat lesser chance that this
option will be exercised.
However, if prices do
rise, and he is called upon to provide a futures
contract at the higher strike price, he can turn around
and exercise the at-the-money call he purchased and buy
a futures contract.
Risk is limited to the net
debit. Maximum profits are equal to the difference
between strike prices minus the net debit.
