Video Transcription
Hello again. Casey Jensen here at OptionsANIMAL. Now we’re getting a little bit more strategy-specific so we’re going to talk about a bull
call spread. How’s a bull call spread work? Well, first off it makes money as a stock goes up. It’s a spread so you’re limiting your risk, but you still
want the stock to go up.
How it works: Let’s say a stock’s trading at 39. I have this little chart down here. Here’s this nice little bullish trend. You feel like stock’s starting
to go up pretty well. What you do is you go buy, first, off we’ll just call this long call at strike price 40. You go buy a call option here at the strike price
40. Again, that acts as your primary instrument for this trade. You want the stock to go up.
Now, to again hedge your bet a little bit, a little bit of a safety net, what you’ll go do now is you’ll go sell a call option at strike price 45. Short
call now at 45. You’re going to get paid in that case, say, 50 cents. You bought this one; it cost you 85 cents so there’s your spread. Overall you’re only paying 35 cents, so really not that much out of pocket. Again, you’re just trying to hit singles, get on base. Comparing this to baseball you’re not just trying to hit home runs all the time.
As this stock goes up you will then be profitable in this trade. If you break down the instruments, right here you’re buying the right to buy the stock at
40. Right here you have the obligation to sell the stock at 45. That’s again why that acts as your hedge and why it also limits your upside potential a
little bit, but again, we’re just looking for consistency. A bull call spread can be a great way to take advantage of a stock that you feel like is headed
up.
