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Option Spreads - Call Vertical Spreads

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In the first article on Options Spreads, we discussed the Advantages of Debit and Credit Spreads. In this article we'll discuss the Call Vertical Spreads; both Debit and Credit.

There are two Call vertical spreads: Call Debit spread (Bull Call), and Call Credit spread (Bear Call).
NOTE: click on the pictures to enlarge.

Bull Call Spread
This spread is comprised of an NTM long call (closer to ATM) and an OTM short call in the same option chain. NTM means near-the-money.

The Bull Call spread has the following characteristics...
o debit spread (you pay for this position)
o bullish expectation (you want the underlying to go up)
o delta is positive
o vega is positive (you want increased volatility)
o theta is negative (lose money to time decay)

In the example to the right, this spread is
o Long 1635 (green box), Short 1645 (red box)
o the cost is $5.25 (or $525 per contract; white box)
o this spread is $10 wide (1645 - 1635)
o max gain $475; max loss $525
o breakeven is 1640.25 (1635 + 5.25)

Capital Requirement is $525 (max loss)
Primary exit strategy (for a profit): exit when the profit reaches a percent ROC (if 50% ROC, then 0.5 x $525 = $262.50 is profit target)
Secondary exit (for a losing position): exit at percent ROC (50% loss = -$262.50; could reverse to a credit spread to reduce the loss.

Bear Call Spread
This spread is comprised of an NTM short call, and an OTM long call in the same option chain.The Bear Call spread has the following characteristics..
o credit spread (you receive premium for this position)
o bearish expectation (you want the underlying to go down)
o delta is negative
o vega is negative (you want decreased volatility)
o theta is positive (make money from time decay)

In the example (see pictures above), this spread is
o Short 1640 (red box); Long 1650 (green box)
o the premiumt is $4.90 (or $490 per contract)
o this spread is $10 wide (1650 - 1640)
o max gain $490; max loss $510
o breakeven is 1644.90 (1640 + 4.90)

The Bull Call spread has the following characteristics...
o debit spread (you pay for this position)
o bullish expectation (you want the underlying to go up)
o delta is positive
o vega is positive (you want increased volatility)
o theta is negative (lose money to time decay)

In the example (see picture above), this spread is
o Long 1635 (green box), Short 1645 (red box)
o the cost is $5.25 (or $525 per contract; white box)
o this spread is $10 wide (1645 - 1635)
o max gain $475; max loss $525
o breakeven is 1640.25 (1635 + 5.25)

Capital Requirement is $525 (max loss)
Primary exit strategy (for a profit): exit when the profit reaches a percent ROC (if 50% ROC, then 0.5 x $525 = $262.50 is profit target)
Secondary exit (for a losing position): exit at percent ROC (50% loss = -$262.50; could reverse to a credit spread to reduce the loss.

In the pictures above are the Risk Profiles (at expiration) for the Bull Call and Bear Call, with breakeven points.

In conclusion, we've discussed the Bull Call Spread (also known as a Call Debit Spread) and the Bear Call Spread (also known as the Call Credit Spread).

If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.

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