Bull Call Spread technique is yet another bullish market strategy. You can use it if you feel market will be conservatively bullish in near terms. This technique has limited profit with limited loss and is combination of two techniques we have already discussed on the website.It is combination of below techniques
- Buying Call – It should be ITM (in the money)
- Selling Call – It should be OTM (Out of money)
- Both of them should be of same Expiry
- Both the trades should be on same instrument (index or stock)
The most important point about the technique is that you need to have prediction about direction of the instrument you are planning to use the strategy. In case your prediction goes wrong then you will have to incur the loss. This is the caveat of this technique. But in case of directional prediction is correct then you will make profit. In case you are in doubt about the direction or do not have expertise on it then you should use direction neutral strategies mentioned on the website.
You can watch either the English Video or Hindi Video to understand the strategy in details.If you are new to Options trading then I would suggest you to watch or read the Getting Started tutorial on Options . That will help you understand the strategies as well.The video below will explain you
- When to use the strategy?
- What is the profit and loss potential of the strategy?
- Explanation of the technique with Nifty example
English Video
Hindi Video
Conclusion
This strategy requires you to have directional understanding of the market. So you should use the technique only if the market is going to be in positive direction. If market moves below or at the strike price you bought Call then you will make maximum loss which is limited as mentioned above. So you should be clear about the direction to minimize loss.
It is profitable if the stock makes movement in the positive direction. This technique is same as Long Call option but lessens the loss by shorting a call option. So you are lessening the loss by amount of short premium. This moves also lessens your profit by the same margin if prices move above the strike price which is sold in this case.
So it tries to maximize profit in case of limited positive movement and lessens loss in case of negative movement. So you should be clear when to use the long call and when to use this spread for better profit potential. There are many techniques mention as part of this Options trading tutorial. You should select the ones which are best for your trading plan or temperament and stick to that. But it is advisable to have better understanding of all the techniques as that will help you use it when their is an opportunity to maximize returns using it.
There are multiple bullish market techniques. Each having its own profit and loss potential along with margin requirement. Based on these you need to select the one which best suits the purpose on that trading day or moment. So it helps to gain insight into all the techniques and understand them in and out to make the most from them. This ensures that your returns from market will be more than someone not utilizing the potential to fullest.