Vertical bull call

Article contents



At a glance



Setting up the bull strategy


  1. Buy one call option on the underlying stock.

  2. Sell one call option on the same underlying stock with a higher strike price.
Ideally you want the stock price to be above short call’s strike at expiration.

Who should run this?


Ideal for all traders, from novice to advanced traders.

Margin requirements


Learn more about Questrade’s option margin requirements.

Strategy overview



A vertical call spread is an options strategy in which a trader buys and sells a short and long call option of the same underlying symbol simultaneously. The call options must have identical expiration dates but different strike prices.

This strategy may be used by a trader who wants to offset the cost of purchasing the long call option by selling a short call option. However, keep in mind, that this also limits the potential profit.

There are two types of vertical call spreads:


Spread type
Description
Bull Used by a trader who thinks the security’s price will rise before the call options expire.
Bear Used by a trader who thinks the security’s price will fall before the call options expire.

To learn more, see Vertical bear call.


Strategy benefits


  • Cost savings when implementing a bullish call spread due to the premium received from selling the short call. 

Strategy downsides


  • Profit potential is capped when implementing a bullish call spread.

Vertical bull call example



Scenario

You believe that ABC shares currently trading at $50 will rise moderately, so you buy a $45 long call option for $500 and sell a $55 short call option for $100. Your initial investment would be a debit of $400.
This strategy means that you:


  • as the buyer of the call option, have the right to buy the shares at $45 before the expiration date

  • and

  • as the seller of the call option, have the obligation to sell the shares at $55 before the expiration date, if the option is exercised.

Possible results


  1. At expiration, the stock’s price closes at $56, meaning both options expire in the money (i.e. the strike prices – $45 and $55 – are both below the market price of the stock). In this case both call options would be exercised. The intrinsic value of the call options would be as follows:

    • $1100 for the long call ($56 - $45) x 100
    • $100 for the short call ($55 - $56) x 100

      Your spread value would be $1000 minus your initial investment of $400, which would leave you with a profit of $600. 
  2. At expiration, the shares close at $39, meaning both options would expire worthless. Your initial investment of $400 would be lost.

Profit and loss explained



Maximum profit

  • Max Profit = [(strike price of short call – strike price of long call)] x (number of contracts) x 100   – option premium paid

Maximum loss


  • Maximum loss = option premium paid

Break-even at expiration


  • Break-even point = strike price of long call + long option premium – short option premium

Sample calculations



  • Stock value at start of strategy: $50
  • To execute the strategy: Buy $45 long call option for $500, Sell $55 short call option for $100
  • Result: $400 net debit
Stock price at expiration Profit and loss calculations 
$39 $5 (long call option premium)
- $1 (short call option premium)
x 100 (number of shares)
= $400 loss
$56 $55 (strike price of short call option)
-$45 (strike price of long call option)
= [$10 x 1 (option contracts) x 1 (number of option contracts) x 100 (number of shares) = $1000]
-$400 (total option premium paid)
= $600 profit


Note
: commission fees are not included in the above calculations.


Payoff diagram






Creating a vertical bull call







Standard order details

Order detail

Description

Symbol lookup field

Click  and change the mode to . Then enter the symbol you want to buy or sell. The default expiration date, strike price, and strategy appear. 




Tip: click the Option tab to view a more detailed option quote.

Modify the expiration date, strike price, and option strategy accordingly. For more information, see Elements of an option quote.
Action

The buy or sell action is set for you when you select the strategy type.

Qty

Select a value using the arrows , or enter a value manually.

Note: by default, the quantity will be populated with the value set in your user preferences.
Order type Select the type of order you want to submit. When creating strategy orders, only Limit or Market order types are available. For more information, see Order types.

The limit order type requires you to fill in additional fields. Refer to the table section below for details.
Duration

Select a duration to specify how long the order should remain active. For more information, see Order durations.

Route Select a route or leave the selection at Auto to let the platform determine the best one. Canadian routes will be listed for Canadian symbols and U.S. routes will be listed for U.S symbols.
Sub-route

This field will be filtered according to the route selection. It indicates where you prefer the order to be executed. Leave the selection at Auto to let the platform determine the best route.

Note: sub-route selection is only available for Canadian symbols.
Order type-specific details
Limit price Enter your limit price:

  • To have the price fluctuate according to real-time data, select . The icon changes to a lock icon , which locks the limit price. Once locked, use the refresh button to automatically update your limit price.
  • To choose a custom price, select .
Note: if real-time market data is not available, the limit price will be blank and the float limit icon will be unlocked.






Note: the video tutorial above shows how to create a vertical bull call strategy using IQ Edge; however, the principles are the same for IQ Web.
Tip: for an optimized viewing experience, watch the video on YouTube in full 720p HD. To open the video in YouTube, click the YouTube button in the bottom right corner of the video window and select the change settings icon to modify the video quality.


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