In this strategy, one expects markets to go up
Bull spread - call Strategy(definition)
A bull call spread is constructed by buying a call option with a low exercise price (K), and selling another call option with a higher exercise price.
Often the call with the lower exercise price will be at-the-money while the call with the higher exercise price is out-of-the-money.
Both calls must have the same underlying security and expiration month.
Example:
Date: July 5th 2011.
Nifty Current Value: 5630
- Sell (write) one lot of 5800 Call (28 JUL 2011 expiry) at a premium of 35.
- Buy one lot of 5600 Call (28 JUL 2011 expiry) at a premium of 120.
95 Rs (35 - 120) per lot is debited from your account entering the above position. You will make profits if Nifty ends expiry above 5695 (5600 + 95)
Below are the various profit/loss scenarios at expiry
- Nifty ends above 5800 - You will make profits of 4000 Rs
- Nifty ends between (5695 - 5800) - You will make profits ranging from (0 Rs - 4000 Rs)
- Nifty ends below 5695 - You will make losses ranging between 0 Rs to 4750 Rs.
If you are a smart trader, you will get opportunities before expiry to exit the bull spread strategy with decent profits even if Nifty does not rise above 5695.
(write:buy) ratio in the above example is 1:1 and the gap between write and buy contracts is 200 Points in Nifty. You can tweak the (write:buy) ratio and gap to build you own strategy based on your risk appetite.
Note: I did not include brokerage charges in the above example
Any views on this strategy are welcome. Let us know how it works for you.
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