Bull Call Spread
The bull call spread is an option spread designed to benefit from a bullish market (as the name of this strategy does imply).
There are different types of vertical spreads – the credit spread – and the debit spread.
The credit spread is a spread trade where the trader placing the trade ’sells’ an option closer to the money (where the stock being used currently resides) and then purchases another option behind it – or further away from the money than the one being sold. The purpose of the the purchased option is to provide ‘covererage’ or ‘insurance’ from a move against the the position – and by having this ‘coverage’ in place, the trader can create a limited loss position.
On the other side of the coin is the debit spread. With this trade the non directional trader putting this position on ‘buys’ an option closer to the money from where the stock being used currently resides – then sells another option behind it – or further out of the money. The option that is sold is done so to help reduce the risk presented by the option being bought – as it brings some credit into the account to off set the debit made by the trade.
In the same say as the additional option in the credit spread helped to keep that position one which had ‘limited’ losses – the additional option in the debit spread keeps that position from the potential of unlimited gains – making it a limited gain position.
The bull call spread is a debit spread – placed by an option trader who is bullish on whatever underlying is being used for the position.
