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Showing results for tags 'bull call spread'.
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Most of the times I prefer to open a bull call spread rather than writing a covered call for the same profit using less capital. Instead of buying the underlying stock in the covered call strategy, in the bull call spread strategy I have to buy deep-in-the-money call options. It is better for me to sell near-month options as time decay is at its greatest for these options. So the two strategies that I am comparing will involve selling near-month slightly out-of-the-money call options. For example let’s say that the stock ABC currently trading at $100 in June and the July 110 call is priced at $4 while a July 90 call is priced at $11.50. If you enter into a covered call write you have to buy 100 shares of ABC at $100 each and sell a July 110 call. The initial investment is $10000 (long stock) - $400 (short call) = $9600. If you enter a bull call spread you can buy the July 90 call while selling the July 110 call. The initial investment in this case is $1150 (long call) - $400 (short call) = $750. Profit/loss at various ABC stock price on expiration date. Strategy Initial Investment Stock Price on Expiration Below $90 $90 $100 $110 & Above Bull Call Spread 750 -750 -750 250 1250 Covered Call 9600 Unlimited -300 200 1400 The maximum potential profit for the bull call spread is only $150 below than the covered call but the covered call has a potentially unlimited downside risk (all the initial investment $9600 in potential losses). So the bull call spread is a superior strategy to the covered call if you are willing to sacrifice some profits in return for higher leverage and significantly greater downside risk.
