NumaWeb : STRATEGIES : BULL SPREAD

OPTIONS STRATEGY GUIDE

Strategy - BULL SPREAD (details below)

bullish
- very bullish
- moderately bullish + certain that the market will not fall
- moderately bullish + fairly certain that the market will not fall
- bearish in immediate near-term (weeks) + bullish in longer term (months)
bearish
neutral
volatile

BULL SPREAD

Strategy View
Investor thinks that the market will not fall, but wants to cap the risk. Conservative strategy for one who thinks that the market is more likely to rise than fall.

Strategy Implementation
Call option is bought with a strike price of a and another call option sold with a strike of b, producing a net initial debit,
OR
Put option is bought with a stike of a and another put sold with a strike of b, producing a net initial credit.

Upside Potential
Limited in both cases -
Calls: difference between strikes minus initial debit
Puts: net initial credit
Maximum profit if market at expiry is above the higher strike.

Downside Risk
Limited in both cases -
Calls: net initial debit
Puts: difference between strikes minus initial credit
Maximum loss if at expiry market is below the lower strike.

Margin
Possibility for margin requirements to be off-set.

Comment
Time value erosion not too significant due to the balanced position. .

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