Bull Call Spread
Bull Call Spread Strategy
The Bull Call Spread is a cost-effective bullish strategy that allows traders to profit from a moderate increase in the price of an asset. It is particularly attractive for those who expect the price to rise but want to limit the upfront cost of entering the position.
This strategy provides low cost and decent profits if the price rises to a certain level, making it a practical alternative to buying a standard call option.
How the Bull Call Spread Works
The Bull Call Spread is created by combining two positions:
Buying one ATM Call Option (strike price = current market price).
Selling one OTM Call Option (strike price = higher than the current market price).
By selling the OTM call, the premium received helps offset the cost of buying the ATM call. This reduces the total premium required compared to purchasing a call option outright.
Cost: Lower than a single ATM call option.
Profit: Capped at the difference between the two strike prices minus the net premium.
Risk: Limited to the premium paid.
Break-Even Price
The break-even price of the Bull Call Spread is lower than buying just an ATM call. This means the underlying asset only needs to rise moderately for the strategy to be profitable.
Example with ETH
Suppose ETH is trading at $4,200.
Buy: 1 ATM Call Option at strike = $4,200.
Sell: 1 OTM Call Option at strike = $4,600.
Scenario 1: ETH rises to $4,800 before expiry
The ATM call gains significant value.
The OTM call is exercised by the buyer, capping further upside.
Net result: Profit capped at the difference between strike prices ($4,600 – $4,200 = $400), minus the net premium.
Scenario 2: ETH rises slightly to $4,400
The ATM call is partially profitable.
The OTM call expires worthless.
Net result: Moderate profit after deducting premiums.
Scenario 3: ETH stays at $4,200 or falls
Both options expire worthless.
Net result: Loss limited to the premium paid.
Why Use the Bull Call Spread on Nexo Options?
Cost-Effective: Requires less premium compared to a plain call option.
Defined Risk and Reward: Both maximum loss and maximum profit are known in advance.
Efficient for Moderate Rallies: Ideal for traders who expect a steady but not explosive rise in price.
Flexible Tool: Can be used for both short-term speculation and risk-managed portfolio strategies.
The Bull Call Spread is best suited for traders with a moderately bullish outlook who want to participate in potential gains while keeping costs low.
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