Call spreads are a type of strategy used by options investors in all kinds of markets. It is applicable in sideways, bear and bull markets so it’s a good strategy to master. In call spreads you will buy and sell call options at the same time. The spread limits profit but it also limits risk and that is why this strategy is used so frequently.
There are variations of the call spreads. For example, the bull call spreads involve buying a call option at a lower strike price and then selling a call option at a higher strike price. The buying and selling of call options spreads the profit potential with actual profit depending on whether the strike price is reached.
Risk in the bull call spreads is limited because the short call option is offset by the long call option. The bull call spread is one of the most commonly used trading strategies because you can limit risk with the purchase of the call option and lower costs by selling the option and earning the premium. You can also limit the effects of time decay because the long and the short option are subject to time decay as the option moves towards expiration.
The main disadvantage of the bull call spreads is the fact that profit potential is limited by the short call.
The bull call spread is used when the price of the option’s underlying security is expected to rise. Some traders will use this strategy when the market is expected to undergo seasonal fluctuations for example. It is also used when market fundamentals indicate a rising market.
Filed under Option Trading Strategies by on Sep 25th, 2011. Comment. 
The long option is one in which you have taken a long position which means you are buying the option. You can buy a long call which is the right to buy an underlying asset or you can buy a long put which is a right to sell an underlying asset.
Buying Calls
Buying call options is one type of long option. When you buy the call option you are purchasing a right, but not an obligation, to buy the underlying future at a strike price as defined in the option contract. The value of the option increases when the underlying asset price increases. If the underlying asset price were to fall, time decay would erode the premium in addition to the loss of the asset value.
In other words, for the value of the long option to increase when buying calls, the market price of the underlying asset must be rising. That means you would be watching for a market that is trending upward.
Buying Puts
Buying put options is a second type of long option. When you buy the put option you are purchasing a right to sell an underlying asset at the strike price. The long put places you in a short position. In other words, you are buying the right to be short. To make money, the underlying asset has to move towards the strike price in the options contract.
The long option is commonly used by traders because there is limited loss on both the long call and the long put. The most you can lose on the long option is the premium plus any transactions costs.
Filed under Option Trading Strategies by on Jul 29th, 2011. Comment.
The bull spread (not to be confused with Spread Betting) is an option strategy that is used when you have formed an opinion that the market price of the option’s underlying asset is going to rise during the option period. In a bull spread you are purchasing options with the same underlying asset but with different strike prices and/or different expiration dates. There is flexibility in how you structure your bull spread.
For example, a stock is priced at $9.50. You buy a call with a $10.00 strike price and a $.25 premium. You could buy the call and hope the stock price rises above the $10.00 strike price and is in the money. Right now it is out of the money. You do expect the stock to increase in price given the market conditions but you are not sure how high the price will go so the $1,250 premium is looking somewhat expensive.
Since the stock is going to go up, there is an opportunity but there is also a risk if the stock does not perform. In the bull spread, you can write a call that has a higher strike price and an earlier expiration date. The bull spread is the difference between the premiums. The most profit you can expect in this particular example is the difference between the strike prices less the difference between the premiums.
The most you can lose on the bull spread is the difference between the premiums times the number of options (100 shares/option). There are bull call spreads and bull put spreads.
Filed under Option Trading Strategies by on Jul 17th, 2011. Comment.