Buying and selling calls or buying and selling put options can result in establishing a spread. Trading a spread with the hope that the market goes up on the underlying stock means you have created a bull or bullish spread.
A bullish spread is created when your gain is driectly tied to the market rising and effecting your option contracts positively.
Bull Call Spread Example
Buy 1 WDF Sep 40 Call@5
Short 1 WDF Sep 45 Call@4
The above example will show a bullish strategy. The investor is buying a call option with a September expiration, a stike price of 40 (the right to buy the stock at) and he is paying a $500 premium. This buy call is a bullish option by itself. The Short position is a call option with a strike price of 45 (the obligation to sell at price), and the investor is receiving a $400 premium.
This investor thinks the market will go up. He has lost $100 on the spread (the difference in the premiums paid and recieved), and he hopes the options will trade or get exercised. If the market goes down (bearish) and the options expire worthless, then the investor loses the $100 premium and this option strategy has been a loss.
The options investor wants the market to rise and for both contracts to get exercised. The person will make the 5 point strike price difference, minus the $100 premium lost. This $400 potential is the maximum gain.
The maximum loss in this trading spread strategy is the $100 premium. This is a call bull spread.
Bull Put Spread Example
Puts can be bought and sold to create a spread. These spreads can be bullish or bearish. A bull Put position would be as follows:
Buy 1 DFT Oct 80 Put@6
Short 1 DFT Oct 90 Put@9
In this case, the investor is long the bearish option (a buy put is a bear option position), has the right to sell the stock at 80 and is paying a $600 premium. The option he is shorting has a 90 strike price (short put holders must buy the stock at the strike price) and is getting a $900 premium.
This is resulting in a net credit of $300. Since the investor has a gain of $300 and is controlling puts, the only way he will make money is if the options expire worthless. This is a credit spread. The premium gained is the maximum gain on the options.
Since the maximum gain is already established, having the options exercised or traded would not be profitable. If the market was bear in direction, the options investor would have a negative on the strike price difference (selling at 80 and buying at 90). Remember, Puts are the opposite of calls. A "Buy Put" means you have the right to sell the stock. The higher strike price is best when you are long puts. The loss potential on this bull spread is the strike price difference minus the premium gained.
You would be bullish here. If the market rises, both puts should expire and the premium gain is safe.
This is a bull put spread.
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