4/3/2023 0 Comments Strike definition![]() This means that the position has a “net positive delta.” Delta estimates how much an option price will change as the stock price changes, and the change in option price is generally less than dollar-for-dollar with the change in stock price. A bull call spread is the strategy of choice when the forecast is for a gradual price rise to the strike price of the short call.Ī bull call spread rises in price as the stock price rises and declines as the stock price falls. Bull call spreads benefit from two factors, a rising stock price and time decay of the short option. In practice, however, choosing a bull call spread instead of buying only the lower strike call is a subjective decision. Since most stock price changes are “small,” bull call spreads, in theory, have a greater chance of making a larger percentage profit than buying only the lower strike call. Therefore, the ideal forecast is “modestly bullish.”īull call spreads have limited profit potential, but they cost less than buying only the lower strike call. Short 105 Call Profit/(Loss) at Expirationīull Call Spread Profit/(Loss) at ExpirationĪ bull call spread performs best when the price of the underlying stock rises above the strike price of the short call at expiration. Long 100 Call Profit/(Loss) at Expiration Profit/Loss diagram and table: bull call spread Strike price of long call (lower strike) plus net premium paid Both calls will expire worthless if the stock price at expiration is below the strike price of the long call (lower strike). A loss of this amount is realized if the position is held to expiration and both calls expire worthless. The maximum risk is equal to the cost of the spread including commissions. ![]() ![]() However, there is a possibility of early assignment. Short calls are generally assigned at expiration when the stock price is above the strike price. This maximum profit is realized if the stock price is at or above the strike price of the short call at expiration. The maximum profit, therefore, is 3.20 (5.00 – 1.80 = 3.20) per share less commissions. ![]() In the example above, the difference between the strike prices is 5.00 (105.00 – 100.00 = 5.00), and the net cost of the spread is 1.80 (3.30 – 1.50 = 1.80). Potential profit is limited to the difference between the strike prices minus the net cost of the spread including commissions. Profit is limited if the stock price rises above the strike price of the short call, and potential loss is limited if the stock price falls below the strike price of the long call (lower strike). A bull call spread is established for a net debit (or net cost) and profits as the underlying stock rises in price. Both calls have the same underlying stock and the same expiration date. A bull call spread consists of one long call with a lower strike price and one short call with a higher strike price. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |