Options Trading Strategies: Bull Call Spread
A bull call spread (long call spread) is a two legged strategy implemented by buying an At The Money or In The Money call, and simultaneously selling an Out of The Money call, with the same expiration date.
There is also a version of the bull call spread with different expirations, a calendar call, as an alternative to covered call, that includes buying an ITM call as a substitute to buying a BTC/ETH, and selling an OTM call with a different expiration dates.
When to use this strategy?
You are moderately bullish and expect that the price of the BTC/ETH will slightly rise in the near term.
Below is a Profit and Loss chart example of a bull call spread options strategy:
Pros:
This strategy is an alternative to a long call, as it costs less, and is less risky than only buying a call.The maximum loss is limited.
Cons:
You can achieve high gains only if you select deep Out of The Money strikes, and that undermines your chances that a BTC/ETH price will rise that high. Also, less risk brings you less gain as your maximum profit is capped.
Example:
In this example, BTC is trading at 37,922.89 USD, and you expect its price to moderately rise. You have bought an ATM call with a strike price of 37,000.00 USD, and sold an OTM call with with a strike price of 39,000.00 USD, both with an expiration date of February 5th 2022. As this is a debit spread, and a long callcosts you more than a premium from a short call you have paid a net premium of 970.33 USD, and this is also your maximum loss.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is at or below the lower strike price, then both calls expire worthless and no position is created, and you are at your maximum loss.
If the BTC price is above the lower strike price but not above the higher strike price, the long call gets exercised, and you are in a long BTC position, giving you profit if the bitcoin price is above the break even.
If the BTC price ends above the short call strike price, then the long call option is exercised and the short call option is assigned. This means that BTC will be bought at the lower strike price and sold at the higher strike price which, minus the net premium, is your maximum profit.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 37,000.00 (strike price LC) | -970.33 (max loss) |
| 37,114.00 | -856.33 |
| 37,496.00 | -474.33 |
| 37,842.00 | -128.33 |
| 37,970.33 (break even) | 0 |
| 38,153.00 | +182.67 |
| 38,504.00 | +533.67 |
| 38,868.00 | +897.67 |
| 39,000.00 (strike price SC) | +1,029.67 (max gain) |