Bull Call Spread & Call Option Comparison
Bull Call Spread
The Bull Call Spread is liked by many traders more than simply buying a call option for two main reasons:
- Reduces the capital spent/lower breakeven price.
- Is a strategy than incorporates reality.
Lower Cost, Lower Breakeven Price
Because a bull call spread involves the selling of an option, the money required for the strategy is less than buying a call option outright. Moreover, the breakeven price is lowered when implementing a bull call spread. To illustrate the cash outlay and breakeven prices for a bull call spread and just a call option are given next:
- Bull Call Spread: cost $42; breakeven price $52.92
- Call Option: cost $60; breakeven price $53.10
In percentage terms, the bull call spread is 30% cheaper than purchasing only the call option.
The second advantage/disadvantage of a bull call spread is that this strategy considers the reality and probabilities of a potential move. Theoretically, buying a call strategy has unlimited profit potential. However, successful option traders generally focus on probabilities and take into consideration reality. A stock move from $50 to $55 is a 10% move. This has to occur in the time before expiration, in the example 30 days. In order for a rational options trader to buy just a call, the option trader has to expect a stock move greater than 10% within 30 days.
In conclusion, the bull call spread is a great alternative to simply buying a call outright: the bull call spread reduces the breakeven price and decreases the capital required to be bullish on a stock, it also is a strategy that takes into consideration realistic expectations.