Calling All Call Spreads

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.

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