If you are
feeling generally positive about a stock, bull spreads offer a low risk, low
return strategy. The best way to build a bull spread is to use call options at
or near the current market price of the stock. If the current price was $33 you
could buy a $30 call and write a $35 call.
Example:
With Coca Cola (KO) trading at $40.40, you could buy one $40 Call and
sell one $45 Call. By selling the $45 call you lower your exposure, but also
lower the upside potential. The $40 Call would cost $2.95 and you sell the $45
Call for $.50. So your total cost, and the most you could lose, is $245 ($2.95 x
100 - $.50 x 100).
The
maximum profit would be $255 (($45 – $40 – $2.45) x 100). The limited upside
is the price you pay for lowering your exposure, from $295 to $245, through the
spread.
Using ShareCharts
Option Strategies for Bull Call Spreads the entire transaction can be seen
clearly. Go to Derivatives < Option Strategies and select Bull Call Spread
from the ‘Strategy’ Drop Down Box. Enter in all relevant parameters and
click ‘Update’ to view the chart.