Bull Calendar Spread Explained

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Key Concepts Options Strategies

Calendar Spread

A Long Calendar Spread is a low-risk, directionally neutral strategy that profits from the passage of time and/or an increase in implied volatility.

Directional Assumption: Neutral

Setup: A calendar is comprised of a short option (call or put) in a near-term expiration cycle, and a long option (call or put) in a longer-term expiration cycle. Both options are of the same type and use the same strike price.

– Sell near-term Put/Call
– Buy longer-term Put/Call

Ideal Implied Volatility Environment : Low

Max Profit: The maximum profit potential of a Calendar Spread can’t be calculated due to both options being in different expiration cycles. One of the most positive outcomes for a Calendar Spread is for the trade to double in price.

How to Calculate Breakeven(s):The break-even for a calendar spread cannot be calculated due to the different expiration cycles being used. A guideline we use is within 1 strike of the Calendar Spread’s strike price.

There are two things to remember when it comes to calendar spreads:

1. If the stock price moves too far from our strikes, the trade will become a loser.
2. An implied volatility increase will help our trade make money.

Keeping this information in mind is most helpful when setting up the trade. We pick strikes that are near the stock price, if not right on the stock price. We may skew it slightly bullish or slightly bearish if we have a small directional assumption, but it will be very close to the stock price regardless – that gives us the most exposure to profit or loss with changes in implied volatility. You will only see us routing this strategy in the lowest of IV environments.

When do we close Calendar Spreads?
Since a calendar spread can be hurt by too much stock movement, we tend to manage our winners at around 25% of the debit we paid to enter the trade. Waiting too long for additional profits could mean stock price movement, which is bad for the position. We never route calendar spreads in volatility instruments. Each expiration acts as its own underlying, so our max loss is not defined.

When do we manage Calendar Spreads?
Since this is a debit spread that is defined risk, we don’t usually manage these spreads. We are comfortable with the debit paid as max loss, and there’s not much we can do with these spreads regardless since they share the same strike.

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Bull Call Spread Options Trading Strategy Explained

Published on Wednesday, April 18, 2020 | Modified on Wednesday, June 5, 2020

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Bull Call Spread Options Strategy

Strategy Level Beginners
Instruments Traded Call
Number of Positions 2
Market View Bullish
Risk Profile Limited
Reward Profile Limited
Breakeven Point Strike price of purchased call + net premium paid

A Bull Call Spread (or Bull Call Debit Spread) strategy is meant for investors who are moderately bullish of the market and are expecting mild rise in the price of underlying. The strategy involves taking two positions of buying a Call Option and selling of a Call Option. The risk and reward in this strategy is limited.

A Bull Call Spread strategy involves Buy ITM Call Option and Sell OTM Call Option.

For example, if you are of the view that NIFTY will rise moderately in near future then you can Buy NIFTY Call Option at ITM and Sell Nifty Call Option at OTM. You will earn massively when both of your Options are exercised and incur huge losses when both Options are not exercised.

When to use Bull Call Spread strategy?

A Bull Call Spread strategy works well when you’re Bullish of the market but expect the underlying to gain mildly in near future.

Example

Suppose you are bullish on Nifty, currently trading 10,500, and expecting a mild rise in its price. You can benefit from this strategy by buying a Call with a Strike price of 10,300 at a premium of 170 and selling a Call option with a strike price 10,700 at a premium of в‚№60. The net premium paid here is в‚№110 which is also your maximum loss.

Bull Call Spread of NIFTY

Current Nifty 10,500
Option Lot Size 75
Strike Price of Call Option в‚№10,300
Premium Paid в‚№170
Strike Price of short Call Option 10,700
Premium Received в‚№60
Net Premium Paid в‚№110
Break Even Point
(Strike Price of bought call + Net Premium)
10,410

The Bull Call spread strategy has done 3 things:

  • It has brought down the break-even point. If only the Call Option was purchased, the break-even point would have been 10, 470. Now it is 10,410.
  • It has brought down the net premium. If only the Call Option was purchased, the premium paid would have been в‚№170. Now it is в‚№110.
  • It has also brought down the extent of the loss. If only the Call Option was purchased, the maximum loss would have been в‚№170. Now it is в‚№110.

Bull Call Spread Strategy Payoff Schedule

Payoff Schedule

Payoff from
Nifty on Expiry Long Call Option
(SP-BEP)
BEP = 10,470
Max Loss = 12750
Short Call Option
(BEP-SP)
BEP = 10,760
Max Profit = 4500
Net Payoff(в‚№)
9,700 -12750 4500 -8250
9,900 -12750 4500 -8250
10,100 -12750 4500 -8250
10,200 -12750 4500 -8250
10,410 -4500 4500 0
10,600 9750 4500 14250
10,800 24750 -3000 21750

Market View – Bullish

When you are expecting a moderate rise in the price of the underlying.

Actions

  • Buy ITM Call Option
  • Sell OTM Call Option

A Bull Call Spread strategy involves Buy ITM Call Option + Sell OTM Call Option.

For example, if you are of the view that Nifty will rise moderately in near future then you can Buy NIFTY Call Option at ITM and Sell NIFTY 50 Call Option at OTM. You will earn massively when both of your Options are exercised and incur huge losses when both Options are not exercised.

Breakeven Point

Strike price of purchased call + net premium paid

Risk Profile of Bull Call Spread

Limited

The trade will result in a loss if the price of the underlying decreases at expiration. The maximum loss is limited to net premium paid.

Max Loss = Net Premium Paid

Max Loss happens when the strike price of Call is less than or equal to price of the underlying.

Reward Profile of Bull Call Spread

Limited

Limited To The Difference Between Two Strike Prices Minus Net Premium

Maximum profit happens when the price of the underlying rises above strike price of two Calls. The profit is limited to the difference between two strike prices minus net premium paid.

Max Profit = (Strike Price of Call 1 – Strike Price of Call 2) – Net Premium Paid

Bull Call Spreads Screener

Stocks: 15 20 minute delay (Cboe BZX is real-time), ET. Volume reflects consolidated markets. Futures and Forex: 10 or 15 minute delay, CT.

© 2020 Barchart.com, Inc. All Rights Reserved.

About Bull Calls

The best bull call strategy is one where you think the price of the underlying stock will go up.

Using a bull call strategy, you buy a call option, and sell the same number of higher striking call options. The calls are for the same underlying stock, expiring in the same month.

  1. You buy 1 call
  2. You sell 1 higher strike call

Bear Call, Bull Call, Bear Put and Bull Put Strategies: These pages are initially sorted by descending “Break Even Probability.”

Options information is delayed a minimum of 15 minutes, and is updated at least once every 15-minutes through-out the day. The screener displays probability calculations based on the delayed stock price at the time the strategy is updated.

Main features of the Screener include:

  • Ability to add various filters, with hundreds of different combinations.
  • Save a Screener: When you’ve defined filters that you want to use again, save the screener.
  • Load a Saved Screener: Select a previously saved set of Screener filters to view today’s results.
  • View the Results using Flipcharts: Page through charts of the symbols on the results page.
  • Download the Results: Download up to 1000 results to a .csv file. The Download will also pull all of the data fields present on the View you use. Barchart Premier Members may download up to 100 .csv files per day.
  • Send an End-of-Day Email of a Screener’s Results: Barchart Premier Members can save a screener, and opt to receive 10, 25, or 50 results via email along with an optional .csv file of the top 1000 results. Emails are sent at 4:45pm CT Monday thru Friday.
Filters

Barchart Premier subscribers can add or modify different filters on the screener to find calls on the most favorable stock options.

Reordering Filters

Once filters are added, you may drag and drop them in the SET FILTERS tab to reorder the way they appear on the RESULTS tab (when using the Filters View). Each filter you add has the “Order” icon which is used to reposition it.

So you can focus on the best options, the screener starts by removing certain options:

  • Days to Expiration (monthly expirations only) is 60 days or less.
  • Security Type is only Stocks.
  • The Options Volume for both legs must be greater than or equal to 500.
  • Open Interest for both legs must be greater than or equal to 100.
  • Moneyness for Leg 1 is between -25% to 5% (OTM and ATM)
  • Break-Even Probability is greater than 25%.
  • The Leg 2 Bid Price must be greater than 0.05
  • The stock price must be greater or equal to 1.00.
  • The option must not be an “adjusted” option (the option cannot be based on a split stock).

Note: “Restricted options” (options quotes marked with an asterisk * after the strike price, and found on an individual symbol’s options page) are automatically removed from the screener. A “restricted option” is typically created after spin-offs or mergers, and is not tradeable.

Probability Calculation

We take the underlying stock price, the break even point (target price), the days to expiration, and the 52-week historical volatility, and then use those figures in this formula. Depending on the strategy, we use the above or below probability (i.e., the probability the price crosses the break even point).

Pabove = N(d)
Pbelow = 1 – N(d)
where
N(d)= x if d > 0
= (1-x) if d and
d = 1n(b/l) / v√t,
y = 1/(1 + 0.2316419|d|),
z = 0.3989423e – (d*d)/2,
x = 1 – z(1.330274y⁵ – 1.821256y⁴ + 1.781478y³ – 0.356538y² + 0.3193815y)
and
b = break even point
l = last price
v = 52-week historical volatility
t = days to expiration
e = 2.71828

Views

The Results page contains three standard views. You may switch the view using the links at the top of the screener results table. The Main View shows the Volume and Open Interest for each option, while the Dividend & Earnings View can be used to highlight strategies with upcoming dividends and earnings. The Filter view shows you the data contained in the field(s) you’ve added to the screener.

Main View

  • Stock Symbol – the underlying equity. Clicking on the symbol will take you to the current quote page.
  • Last – the delayed stock price at the time the strategy is updated for the underlying equity.
  • Max Profit – the potential return of this strategy. Max Profit is: Leg 2 Strike (Short Call) – Leg 1 Strike (Long Call) + Leg 2 Bid (ITM Call) – Leg 1 Ask (OTM Call) [Net Premium Paid]
  • Max Profit% – the maximum profit, expressed as a percent. Maximum profit is achieved when the price of the underlying stock is greater than or equal to the strike price of the short call.
  • Max Loss – the maximum loss that the strategy might return, which is equal to the net premium paid (Leg 1 Ask – Leg 2 Bid). Max loss occurs when the price of the underlying stock is less than or equal to the strike price of the long call.
  • Break Even – the price of the underlying stock at which break-even is achieved: (long call strike price + the net premium paid to buy the long call)
  • Probability – the probability the last price will be at or beyond the break even point at expiration.
  • Exp Date – the expiration date of the option

Depending on the strategy, you will be looking to buy (long) one option, and sell (short) another. The next four columns identify the strike price and bid/ask for each long and short option:

  • Leg 1 (Buy) Strike – the price at which the underlying security can be bought if the option is exercised.
  • Leg 1 Ask – the premium to purchase this option.
  • Leg 2 (Sell) Strike – the price at which the underlying security can be bought if the option is exercised.
  • Leg 2 Bid – the premium to sell this option.
  • Dividend & Earnings View

    • Dividend – the dividend the equity pays on the Ex-Dividend Date. On the morning of the Dividend Ex-Date, the stock’s price is lowered by the amount of the dividend that was just paid.
    • Dividend Ex-Date – the first day on which the stock trades without the dividend. If you wish to receive the dividend, you must own the stock by the close of market on the day before the Dividend Ex-Date. Many times, a covered call is exercised early so the buyer can own the stock and collect the dividend. This typically happens to ITM options the day before the Dividend Ex-Date.
    • Earnings Date – The date on which a company is expected to release their next earnings report. The prices are more volatile, which tends to inflate the prices of the near-the-money strikes. During a contract period when there is an earnings report due, the earnings announcement can dramatically shift the range in which the stock has been trading.

    Bull Spread

    A bull spread consists of a buy leg and a sell leg of different strikes for the same expiration and same underlying contract.

    This strategy will pay off in a rising market, also known as a bull market, that is why it is referred to as a bull spread.

    Bull spreads can be constructed from either going long a call spread or going short a put spread.

    Call Bull Spreads

    A trader believes that the market will have a moderate rise before the options expire.

    If the underlying market was trading at 100, he would buy a 105 call for $3 and sell the 110 call for $2. By selling the 110 call, he receives a premium, which offsets the cost of the 105 leg. The total cost of the spread is $1. The breakeven point for the spread is 106. This is the cost of the spread plus the 105 strike.

    The best-case scenario is if the market finishes at or above 110 because the 105-110 call spread will pay off $5. This is the maximum payoff for the spread, regardless of where the underlying finishes. If we subtract the $1 cost of the spread, the total profit for the trade will be $4.

    Assume the underlying finished at 113. The 105 call will pay the trader $8, but he will need to payout $3 on the 110 call. Another example, if the market finishes at 130, the 105 call will pay the trader $25, but he will need to payout $20 on the 110 call.

    The worst-case scenario is if the market finishes at or below 105. Because both the 105 and 110 call expire out-of-the-money and are therefore worthless. The trader loses the full cost of the spread, $1.

    If the trader had purchased only the 105 call at $3, his loss would be $3 versus $1.

    If the underlying finishes at 107.5, the long 105 call will be worth $2.50 and the short 110 call expires worthless. The trader’s payout of $2.50 minus the $1 cost of the spread gives him $1.50 profit.

    If the trader had bought only the 105 call, his payout would still be $2.50, but that is less than the $3 he would have paid for the 105 call alone.

    Put Bull Spreads

    Bull spreads can also be constructed from selling a put spread.

    Selling a put allows you to collect a premium that you can keep if the underlying futures contract finishes at or above the strike price.

    Instead of buying the 105-110 call spread, we can sell the 110-105 put spread. This would entail selling the 110 puts and buying the 105 puts which would result in a $4 credit with the underlying future trading at 100

    The breakeven point for the spread is 106, the 110 strike minus the spread credit of $4. This is the same breakeven point as the call bull spread.

    If the market finishes above 110, the puts expire worthless. Therefore, the trader keeps the $4 he received by selling the put.

    If the market finishes at 103, the 110 put is worth $7 and the 105 put is worth $2. Therefore, the put spread is worth $5 dollars. The trader received $4, and must now payout $5, resulting in a $1 loss.

    If the market finishes at 107.5, the 110 put is worth $2.50 and the 105 put expires worthless. The trader must pay out $2.50 from his $4 credit. Resulting in a $1.50 profit.

    We can see in this chart, that these three scenarios have the same outcome whether we buy a call spread or sell a put spread to create a bullish position. Traders still want the market to finish above the high strike of the spread.

    Bull spreads are a commonly used and valuable options strategy.

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