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 – 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. 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. 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:
