BFS DSEC 4: DERIVATIVES: EQUITY AND

CURRENCY

ISA :V
Semester :V
Academic year: 2024-2025
Mastering the Bull Call Spread Strategy: A
Balanced Approach to Options Trading
-

members:
Aachal naik 2217901
Fenisa dias 2217916
 INDEX
01 How a bull call spread works?

02 Key features

03 Real-Life example

04 Payoff diagram and Profit Potential

05 Why Should One Choose Bull Call Spread ?

06 Pros & Cons of bull call spread

07 When to Use a Bull Call Spread ?

08 Alternative Strategies

09 Key Takeaways
 Why a Bull Call Spread?

Imagine you think a stock will go up, but not confident

enough for an outright call option. What if there’s a way to
hedge your risk, reduce upfront costs, and still profit from
a moderate rise in the market?

Enter the Bull Call Spread!

 How It Works:

STEP 1: Buy a Call at Strike Price X (Lower Strike).

STEP 2: Sell a Call at Strike Price Y (Higher Strike).

- The difference between the premiums paid and received forms

the net debit, which limits the total risk.
 Key Features

Max Profit: Limited to the difference

between the strike prices, minus the net cost

Max Loss: Limited to the net premium

paid upfront.

Breakeven: Strike price of long call

+ Net premium.

Source: Project Finance

 Example: Applying the Strategy

Scenario: Stock Tata Motors is trading at Rs. 950. You anticipate it will
rise to Rs. 1000 within a month.

- Buy Tata Motors call option (strike price Rs. 950) for Rs. 50
- Sell Tata Motors call option (strike price Rs. 1000) for Rs. 35

Net Premium: 50- 35

= Rs. 15
 Profit Calculation

Max Profit= (Strike Price of Short Call - Strike Price of Long Call) - Net
Premium Paid.
Max Loss = Net Premium Paid.

Example:
- Max profit = (Rs. 1000 - Rs. 950) - Rs.15
= Rs. 35 per share.

- Max loss = Rs. 15 (net premium paid).

 Scenario 1: Stock Price Ends at ₹950 or Lower

In this case, both options expire worthless because:

1. The ₹950 long call option has no value.

2. The ₹1000 short call option also expires worthless

Outcome: You lose your net premium of ₹15. This is your maximum loss.
 Scenario 2: Stock Price Ends at ₹975

1. Option you bought (₹950 call): You have the right to buy Tata Motors at ₹950.

Profit
₹975−₹950=₹25 per share.

2. Option you sold (₹1000 call): This option remains worthless.

NET PROFIT:
Profit from ₹950 call: ₹25
Net premium paid: ₹15
Net profit = ₹25 - ₹15
= ₹10 per share
 Scenario 3: Stock Price Ends at ₹1000

1. Option you bought (₹950 call): You exercise the option

Profit
₹1000−₹950=₹50 per share.

2. Option you sold (₹1000 call): This option expires worthless because the stock
price is exactly ₹1000.
Net profit:
Profit from ₹950 call: ₹50
Net premium paid: ₹15
Net profit = ₹50 - ₹15
= ₹35 per share.
 Scenario 4: Stock Price Ends at ₹1050 or Higher

1. Option you bought (₹950 call): You exercise this option

Profit
₹1050−₹950=₹100 per share

2. Option you sold (₹1000 call): The buyer exercises this option
Loss
₹1000−₹950=₹50 per share.

Net profit:
Profit from the bought call (₹950): ₹100
Loss from the sold call (₹1000): ₹50
Net profit = ₹35 per share.
Payoff Diagram & Profit Potential

https://web.sensibull.com/option-strategy-builder
 Why Should One Choose Bull Call
Spread ?

Why anyone would choose to implement a bull call

spread versus buying a plain vanilla call option.

Net Premium: Rs. 50 - Rs. 35 = Rs. 15

Pros of bull call spread cons of bull call spread

Reduced Cost Requires Accurate

Limited Risk Forecasting
Limited Profit Time Sensitivity
Ideal for Moderate Bullish Limited Profit
market Moderate Gain Potential
When to Use a Bull Call Spread ?

Moderate Bullish
Low to Moderate Volatility
Expecting a rise in the underlying
asset price
Source: Trading View
Alternative Strategies

Bull Put Spread: Another limited risk strategy.

Long Call: Higher risk, unlimited profit.
Iron Condor: For range-bound markets.
 Range-
Bearish Bullish
Bound

Low Volatility
Nil Iron Condor Bull Put Spread

Moderate
Volatility
Bear Call Spread Iron Condor Bull Call Spread

High Volatility
Nil Iron Condor Long Call
 Key Takeaways
Low-cost and limited risk
Best for moderately bullish
A moderate move would mean you expect a movement in the
stock/index but it is not too aggressive
‘Moderate’ by evaluating the volatility of the stock/index.
Bull Call spread is a basic spread that you can set up when it is
moderately bullish
Classic bull call spread involves buying ATM option and selling OTM
option ( all belonging to same expiry, same underlying, and equal
quantity)
 References
https://www.investopedia.com/terms/b/bullcallspread.asp#:~:text=The%20bull%20call%20spread
%20is,at%20a%20higher%20strike%20price.

https://zerodha.com/varsity/chapter/bull-call-spread/

https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/bull-
call-spread

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 THANK YOU

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