banner-meus-ynvestimentos

Bull Call Spread

bull-call-spread

1. Definition

The Bull Call Spread, also known as Long Call Spread or Call Debit Spread, is a strategy that takes advantage of hike at the underlying asset’s prices. It comprises selling an OTM Call at strike prices above the current market, and buying an ATM Call at a certain price, with the same maturity.

Buying a Call At-The-Money: buying a Call with strike prices as close as possible to the current share prices. Buying a Call gives you rights of buying a share until the expiry date for the strike price.

Selling a Call Out-The-Money: selling a Call at a strike price higher than the current share prices. Selling a Call forces you to sell a share until the expiry date at the strike.


2. Objective

Making profits from market hikes, with some protection against falls, especially when a trend is not very steady. This operation generates gains from hiking markets up to a limit, and also limited losses if the market drops down.


3. How it works

In this strategy, an ATM Call is purchased and premiums are paid. At the same time, an OTM Call is sold, and a premium is received. Initial balance for the operation is negative, as premiums paid exceed those received. The graphs lead to the following results:

Buying a Call + Selling a Call = Bull Call Spread

Buying a Call

 gráfico Long call_clean

+

Selling a Call

 gráfico Short call_clean

=

Bull Call Spread

 gráfico Bull Call Spread_clean

Caption:

Red = Losses

Yellow = Losses from premiums paid

Green = Profits

Profits: gains are always limited, and are found from the difference between the exercise prices and the premiums paid (which in this case will be a debt of the premium received less the premium paid). Maximum profits occur when the exercise prices for the purchased Call exceed the prices for the Call sold.

Losses: are also limited. The maximum losses happen when exercise prices for the purchased Call are lower, being no more than the net debit of the spread, that is, the premium received less the premium paid..


4. Example

Considere os dados a seguir:

Asset Petrobrás
Date 09/10/2013
Maturity 10/21/2013
Prices of shares 18,72
Days before expiration 41
Number of options 1.000

To set up this operation, one must buy a Call At-The-Money PETRJ18, paying premiums of R$ 1.60 per option and also receiving R$ 1.00 for selling a Call Out-The-Money PETRJ19.

Summary:

 

Type of option Asset Series Number of options Premium Exercise prices Liquidation
Buying a Call Petrobrás PETRJ18 1.000 R$ 1,60 R$ 18,00 R$ -1.600,00
Selling a Call Petrobrás PETRJ19 1.000 R$ 1,00 R$ 19,00 R$ 1.000,00
Total R$ 0,60 -   R$ -600,00

By the expiration date, resultas depend on share pricing as follows:

Share prices by expiration Buying a Call Selling a Call Results
R$ 13,00 R$ -1.600,00 R$ 1.000,00 R$ -600,00
R$ 14,00 R$ -1.600,00 R$ 1.000,00 R$ -600,00
R$ 15,00 R$ -1.600,00 R$ 1.000,00 R$ -600,00
R$ 16,00 R$ -1.600,00 R$ 1.000,00 R$ -600,00
R$ 17,00 R$ -1.600,00 R$ 1.000,00 R$ -600,00
R$ 18,00 R$ -1.600,00 R$ 1.000,00 R$ -600,00
R$ 19,00 R$ -600,00 R$ 1.000,00 R$ 400,00
R$ 20,00 R$ 400,00 R$ 0,00 R$ 400,00
R$ 21,00 R$ 1.400,00 R$ – 1.000,00 R$ 400,00
R$ 22,00 R$ 2.400,00 R$ – 2.000,00 R$ 400,00
R$ 23,00 R$ 3.400,00 R$ – 3.000,00 R$ 400,00
R$ 24,00 R$ 4.400,00 R$ – 4.000,00 R$ 400,00

Results:

If Petrobras sharea are over R$ 18.00 at the maturity date, the investor exercises his option for buying shares at R$ 18.00. However, if share prices suparss R$ 19.00, then the investor is exercised and forced to sell shares at R$ 19.00. Look on the graph below.

Bull Call Spread Pronto

Caption:

Red = Losses

Yellow = Losses from premiums paid

Green = Profits

Earnings: the operations is profitable if Petrobras shares exceed R$ 18.60 (Share prices - Premiums). The maximum earnings from the operation totals R$ 400.00, when the shares can be bought for R$ 18.00 and sold for R$ 19.00. He buys shares at R$ 18.00, sell them for R$ 19.00 and deducts R$ 0.60 per option, which leads to a R$ 400.00 income in total.

Losses: The investor will have a loss if the Petrobrás’s shares is under R$ 18.60 at the maturity, with a maximum loss of R$ 600.00, if the shares is below R$ 18.00. Between R$ 18.60 and R$ 18.00, the investor will have loss, but this loss will be according to the premium paid. As in this case the premium paid was R$ 0.60, it will have a losses because of this premium paid, as the share price within this range of R$ 18.00 to R$ 18.60. So, if the shares is below R$ 18.00, it will not be exercised and the Call sold and will not exercise the Call bought. But as he got a debt of R$ 0.60 per option when buying and selling, this will be the maximum loss, that is, R$ 0.60 * 1,000 = R$ 600.00.

Você também poderá gostar...