Notices

Bull spread

From Traderpedia

Definition:
Conservative option strategy for one who thinks the market is more likely to rise than fall.


Contents

[edit] Strategy view

Investor thinks that the market will not fall, but wants to cap the risk. Conservative strategy for one who thinks that the market is more likely to rise than fall.

[edit] Implementation

Call option is bought with a strike price of a and another call option sold with a strike of b, producing a net initial debit, OR Put option is bought with a stike of a and another put sold with a strike of b, producing a net initial credit.

[edit] Upside potential

Limited in both cases. Calls: difference between strikes minus initial debit. Puts: net initial credit.

Maximum profit if market at expiry is above the higher strike.

[edit] Downside risk

Limited in both cases. Calls: net initial debit Puts: difference between strikes minus initial credit

Maximum loss if at expiry market is below the lower strike.

[edit] Margin

Possibility for margin requirements to be off-set.

[edit] Comment

Time value erosion not too significant due to the balanced position.