Bull Vertical Spread
What Is a Bull Vertical Spread?
A bull vertical spread requires the simultaneous purchase and sale of options with various strike prices, however of a similar class and expiration date.
Grasping Bull Vertical Spreads
A bull vertical spread is an options strategy utilized by investors who feel that the market price of an asset will appreciate yet wish to limit the downside potential associated with a wrong prediction. It could be diverged from a bear vertical spread.
There are two types of bull vertical spreads — a call and a put. A call vertical bull spread includes buying and selling call options, while a put spread includes buying and selling puts.
The bull part hopes to exploit a bullish move, while the vertical part portrays having a similar expiration. Hence, a bull vertical spread hopes to profit from a vertical move in the underlying security. The real advantage of a vertical spread is the downside is limited.
Investors that are bullish on an asset can put on a vertical spread. This involves buying a lower strike option and selling a higher strike one, whether or not it's a put or call spread. Bull call spreads are utilized to exploit an event or large move in the underlying.
Of the two types of bull vertical spreads, the bull call vertical spread incorporates buying an in-the-money call and selling an out-of-the-money call. They are best utilized when volatility is low.
Then, at that point, there's the bull put vertical spread, which includes selling an out of the money put and buying an out of the money further from the underlying price. These types of spreads are best utilized when volatility is high.
Vertical Call and Put Spreads
The max profit of a bull call vertical spread is the spread between the call strikes less the net premium of the contracts. Break-even is calculated as the long call strike plus the net paid for the contracts.
For a bull put vertical spread, the investor will receive income from the transaction, which is the premium from selling the higher strike put less the cost of buying the lower strike put option. The max amount of money made in a bull put vertical spread is from the opening trade. Break-even is calculated as the short put strike less premium received for the put sold.
Bull Vertical Spread Example
An investor hoping to wager on a stock moving higher may set out on a bull vertical call spread. The investor purchases an option on Company ABC. Shares are trading at $50 a share. The investor purchases an in-the-money option with a strike price of $45 for $4 and sells an out-of-the-money call with a strike price of $55 for $3.
At expiration, the price of Company ABC's stock trades at $49. In this case, the investor would exercise their call, paying $45 and afterward selling for $49, netting a $4 profit. The call they sold lapses worthless. The $4 profit from the stock sale, plus the $3 premium and less the $4 premium paid, leaves a net profit of $3 for the spread.
Highlights
- Bull vertical spreads include simultaneously buying and selling options with a similar expiration date on a similar asset however at various strike prices.
- A bull vertical spread is an options strategy utilized when the investor anticipates a moderate rise in the price of the underlying asset.
- Bull vertical spreads come in two types: bull call spreads, which use call options, and bull put spreads, which utilize put options.
