Long Call Spread (aka Bull Call Spread)
Objective: To profit from advances in the chosen underlying
Definition: A long call spread consists of purchasing a call and offsetting the cost by selling another call at a higher strike price. For example, you would buy the 100 call for ($3) and sell the 105 call at $2 for a net debit of $1. This formula works regardless of the underlying’s price.
Maximum Risk: The maximum risk is the original cost.
Maximum Profit: To find the maximum profit, start with the distance between strike prices and SUBRTRACT the cost. [100 ā 105 spread bought for $1 = $ maximum profit ($5 distance between strikes – $1 original cost)].
Benefits: Vertical spreads (both long and short) are the bread-and-butter strategy of professional floor traders since they are the building blocks of more complicated trading strategies.
Break-even (B/E): This is the price the stock must reach at expiration so that you neither gain nor lose on the trade. Ā The break-even of a long call spread is equal to the lower strike price option PLUS the premium paid. If you bought the 100-105 call spread for $1, then the B/E would be $101 (100 lower strike + $1 debit).
If the stock closes lower than the B/E at expiration, then a loss will occur. If the stock closes above the B/E on expiration, then a profit will occur.
Note: There is no time value left when a stock is at expiration. Ā If the stock closes at the higher strike price (or beyond), then the maximum profit is made. The chart below illustrates what happens at various stock prices at expiration
| Long the 100 (long) – 105 (short) call spread cost = $1 | |||||||||
| Stock Price | Long 100 Call | – | Short 105 Call | = | Spread Value | – | Cost | = | Profit or Loss |
| 120 | $20.00 | – | ($15.00) | = | $5.00 | – | $1.00 | = | $4.00 |
| 115 | $15.00 | – | ($10.00) | = | $5.00 | – | $1.00 | = | $4.00 |
| 110 | $10.00 | – | ($5.00) | = | $5.00 | – | $1.00 | = | $4.00 |
| 107 | $7.00 | – | ($2.00) | = | $5.00 | – | $1.00 | = | $4.00 |
| 106 | $6.00 | – | ($1.00) | = | $5.00 | – | $1.00 | = | $4.00 |
| 105 | $5.00 | – | $0.00 | = | $5.00 | – | $1.00 | = | $4.00 |
| 104 | $4.00 | – | $0.00 | = | $4.00 | – | $1.00 | = | $3.00 |
| 103 | $3.00 | – | $0.00 | = | $3.00 | – | $1.00 | = | $2.00 |
| 102 | $2.00 | – | $0.00 | = | $2.00 | – | $1.00 | = | $1.00 |
| 101 | $1.00 | – | $0.00 | = | $1.00 | – | $1.00 | = | $0.00 |
| 100 | $0.00 | – | $0.00 | = | $0.00 | – | $1.00 | = | ($1.00) |
| 99 | $0.00 | – | $0.00 | = | $0.00 | – | $1.00 | = | ($1.00) |
| 98 | $0.00 | – | $0.00 | = | $0.00 | – | $1.00 | = | ($1.00) |
| 95 | $0.00 | – | $0.00 | = | $0.00 | – | $1.00 | = | ($1.00) |
| 90 | $0.00 | – | $0.00 | = | $0.00 | – | $1.00 | = | ($1.00) |
The following profit and loss graph depicts the Call Spreads:
