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SPX Bull Call Spreads


SPX Index is at or above higher strike price of 1405 at expiration

Buy 1 SPX 1400/1405 Call Spread at $2.75 Debit

If the SPX exercise settlement value is exactly at the higher strike price of 1405 at expiration, the short 1405 call will be at-the-money and expire with no value

The long 1400 call will be in-the-money and worth its cash settlement amount:

1405 (settlement value) – 1400 (call strike price) = $5 x $100 = $500

The investor could exercise the long SPX 1400 call to receive its cash settlement amount of $500 and see a profit:

  $500   cash settlement amount received at call’s exercise
- $275   total debit initially paid for call
  $225   profit

If the SPX exercise settlement value is above the higher strike price of 1405, then the investor could expect assignment on the short 1405 call and have to pay its cash settlement amount. However, the investor would exercise the 1400 call and receive its cash settlement amount, which would always be more than 1405 call’s by $500 (difference in strikes of $5 x $100 multiplier).

As an example, say the exercise settlement value of the SPX index is 1408.

  $800   settlement amount received at 1400 call’s exercise ($8 intrinsic value x $100)
- $300   settlement amount paid at 1405 call’s assignment ($3 intrinsic value x $100)
  $500   net cash amount received at expiration

Total net profit at expiration, after exercise and assignment, would be:

  $500   net cash settlement amount received
- $275   total debit initially paid for spread
  $225   profit

On the other hand, if the OEX 600/605 call spread is sold for its intrinsic value as the market settles at 608 on the option’s last trading day, the premium received would be:

  $8   intrinsic value of 600 call (608 OEX level – $600 strike price)
- $3   intrinsic value of 605 call (608 OEX level ?– $605 strike price)
  $5   intrinsic value of spread received x $100 multiplier = $500

The total profit would be the same as after exercise and assignment of the call contracts:

  $500   intrinsic value received at spread’s sale
- $275   total debit initially paid for spread
  $225   profit

This profit of $225 represents a return on an initial investment of $275 total premium paid for the call spread of approximately 81.8% over the 2-month life of the spread.

NOTE: If at any point before expiration the investor feels confident that the long call will expire in-the-money and the short call out-of-the-money, and wants to sell the long call realize a profit or cut a loss, the entire spread should be closed out. Selling only the long call would leave the investor with an uncovered short index call position that has unlimited risk as well a margin requirement, even if the call is sold on the last trading day.


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