Strategies

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Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Bull Call Spread

Example:                 Stock is trading at $68 

Outlook:                  You are bullish on the stock and expect it to rise over the next four weeks. 

Possible strategy:    Bull Call Spread:                                

                                  Buy one 70 strike Call at $3.60

                                  Sell one 75 strike Call at $2.00

                                              Net Debit (cost) $1.60

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Long 70 Call

Short 75 Call

Net Profit
(Loss)

85

$11.40

($8.00)

$3.40

80

$6.40

($3.00)

$3.40

75

$1.40

$2.00

 $3.40

70

($3.60)   

$2.00

($1.60)

65

($3.60)

$2.00

($1.60)

 

 

 At Expiration:

  • Maximum Profit = Difference in Strike Prices - Net Debit
  • Maximum Profit: (75 - 70) - $1.60 = $3.40
  • Breakeven = Lower Strike Price + Net Debit
  • Breakeven: 70 + $1.60 = $71.60
  • Maximum Loss = Net Debit
  • Maximum Loss: $160.00

In Summary: This spread will be profitable if the stock rises above 71.60 but the profit potential is limited at 75 through rights and obligations of the spread.  Risk is limited to the total premium paid for the spread.  Have a timeframe in mind to realize your forecast.      

CBOE Volatility Index (VIX)