Overview
Traders and investors like a trending market because it’s a bit easy to take positions. Trend can be up or down. Up-trending market is referred to as bull market. Unfortunately, markets don’t always trend up. Most of the time, they move sideways. Also there are times in an uptrend where the market continues moving up, with some possibilities of correcting down sharply surprising all participants. Because option market is time-based, we ought to have strategies that consider both possibilities. Bull Call Spread is one such strategy where you can limit risk as well as profit.
How to Execute?
You buy In-The-Money (lower strike) call and sell a Out-Of-The-Money (higher strike) call both of which expire in the same month. For example, if Nifty is currently trading at 5000 and you believe that it can move up to 5200 before expiry, you can buy 4900 strike call assumed to be trading at 200 and sell 5100 strike call assumed to be trading at 100. Maximum profit is made when the underlying stock rises above 5100.
How to Exit?
You just need to sell the In-The-Money (lower strike) call and buy the Out-Of-The-Money (higher strike) call. You can exit any time before expiry or allow the options to expire.
Hope this will be useful. Comments are most welcome. In my next education series post, I will discuss about Bull Put Spread.
Cheers!
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