Bull call spread vs Straight Call

[Robert Morse]

I completely agree with your complaint here.

Well, I have to disagree, and I thought his response was on the nasty side. I did answer his question with my 1st post but without a "YES" or "NO". The "NO" was implied by my response.

 

[easymon1]

No one can give me a straight answer. I just want a Yes / No answer weather my understanding is correct. I also don't want links to more reading material. I would have done that myself already. Hence, the reason i seem to be repeatedly asking this question.

mr moolah,
do please excuse, my good man. getting one's head wrapped around options can spawn a frenzied state in even the best, no? relax, have a home brew. tell us how you do.

 

[ironchef]

From what i understand, to enter a Bull call spread, one Buy a ITM call and Sell a OTM call at the same time to create a pair trade. Everything else about the 2 legs to trade remain the same -- same expiration, same financial product.

For a straight call, one would buy a call and come back another time to enter a sell call to close the position.

The difference between the 2 strategies is that for a bull call spread, the 'close' strike price is decided beforehand when the trade is initiated. However, for a straight call trade, the 'close' strike price is not pre-determined and is up to the trader at what price he wants to close the trade.

Please correct me if i am wrong

Yes

No

Yes

 

[moolah]

Hi Moolah,

I completely agree with your complaint here. So many of the questions asked on this website are answered with just a mumbo-jumbo of data, info, etc... that doesn't even answer the question.

Having said that I can't give you a definite Yes/No either but you seem to have it figured out pretty close.
When you use "close" strike price that confuses your question a bit. OTM strike prices never "close" a trade as you seem to be implying if I read your question correctly.

When you buy a call only, you will decide when you want to sell (close) that position just like any trade and your profit is unlimited. When you buy a bull call spread, you have a long & short so your profit is capped but that doesn't determine when the trade is closed. You will still close the trade just like any trade except you'll be closing 2 positions.

Sorry if this doesn't clarify your question any better.

Hi Bum,

Thanks for your reply. When you mention close 2 positions, do you mean close the 'buy a call' trade and also close the 'bull call spread'? When one enters a bull call spread trade, doesn't the system auto closes your position if your pre-determined sell price is reached?

For bull call spread, the buy side will get executed in order for the trade to be initiated. Thereafter, for the sell side, which hopefully will turn in the money in due course, will get executed when that price is reached. Is my understanding correct?

 

[moolah]

No.

Would you be able to share the similarities and differences between the 2 strategies? Thank you

 

[Philo Judeaus]

It all depends, but ITM options have the highest return for normal market moves.

 

[Bum]

Hi Bum,

Thanks for your reply. When you mention close 2 positions, do you mean close the 'buy a call' trade and also close the 'bull call spread'? When one enters a bull call spread trade, doesn't the system auto closes your position if your pre-determined sell price is reached?

For bull call spread, the buy side will get executed in order for the trade to be initiated. Thereafter, for the sell side, which hopefully will turn in the money in due course, will get executed when that price is reached. Is my understanding correct?

"When one enters a bull call spread trade, doesn't the system auto closes your position if your pre-determined sell price is reached?"

No. The higher strike price is not a "predetermined sell price".

"For bull call spread, the buy side will get executed in order for the trade to be initiated. Thereafter, for the sell side, which hopefully will turn in the money in due course, will get executed when that price is reached. Is my understanding correct?"

When you buy a "bull call spread" you're actually entering 2 separate positions at the same time even though your broker will execute it as 1 trade. If you buy the 350/400 call spread, you're actually going long the 350 call and short the 400 call at the same time. Your broker will not close a position at any predetermined price. The 2 positions will be listed individually in your account so you can close both at once or close them individually at different times/days.

You seem to be thinking that if you enter a 350/400 "bull call spread" the trade will be closed if the price of _____ gets to 400. That is not correct. The trade (2 positions) won't close unless you place an order(s) to close the trade.

If price of ____ is @ 350 and you buy the 350/400 call spread, as price rises you'll be making money in the "long 350 call" position but losing money in the "short 400 call" position but the lower strike position will be making more money than you're losing in the higher strike position. I'm leaving out the "premium decay" that's involved in options.

 

[moolah]

"When one enters a bull call spread trade, doesn't the system auto closes your position if your pre-determined sell price is reached?"

No. The higher strike price is not a "predetermined sell price".

"For bull call spread, the buy side will get executed in order for the trade to be initiated. Thereafter, for the sell side, which hopefully will turn in the money in due course, will get executed when that price is reached. Is my understanding correct?"

When you buy a "bull call spread" you're actually entering 2 separate positions at the same time even though your broker will execute it as 1 trade. If you buy the 350/400 call spread, you're actually going long the 350 call and short the 400 call at the same time. Your broker will not close a position at any predetermined price. The 2 positions will be listed individually in your account so you can close both at once or close them individually at different times/days.

You seem to be thinking that if you enter a 350/400 "bull call spread" the trade will be closed if the price of _____ gets to 400. That is not correct. The trade (2 positions) won't close unless you place an order(s) to close the trade.

If price of ____ is @ 350 and you buy the 350/400 call spread, as price rises you'll be making money in the "long 350 call" position but losing money in the "short 400 call" position but the lower strike position will be making more money than you're losing in the higher strike position. I'm leaving out the "premium decay" that's involved in options.

Thanks for your reply. So when i put in this trade, the money i spent is due to the long leg and in the event the short leg expire worthless, that is where i will make money in this trade?

 

[Bum]

"Money spent" is the long leg minus the short leg.

Example: Current quotes:
350 Call = 30
400 Call = 10
Cost of trade = 20 (this is maximum loss)
BE = 370
Max. Profit = 30 (50-20)

At expiration stock is @ 360:
350 Call is worth 10 so loss of 20 (30-10)
400 Call is worth 0 so profit of 10 (you were short this leg)
Total Trade = Loss of 10 (20-10)

At expiration stock is @ 390:
350 Call is worth 40 so profit of 10 (40-30)
400 Call is worth 0 so profit of 10 (you were short this leg)
Total Trade = Profit of 20 (10+10)

At expiration stock is @ 450:
350 Call is worth 100 so profit of 70 (100-30)
400 Call is worth 50 so loss of 40 (you were short this leg)(50-10)
Total Trade = Profit of 30 (70-40)

 

[marameo]

While payoff at expiry is clear what happens when the underlying is either in-the-range (between the strikes) or out-of-the-range before expiration?