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The Different Option Strategies
Call Spread
A Call Spread is an excellent strategy for bullish traders who want a nice low risk, limited return strategy
Also known as Debit Spreads (in that you pay option premium for them). Excellent strategy for bullish traders who want a nice low risk, limited return strategy.

Call Spread
Risk: Limited
Reward: Limited
The Trade: Buy a call and sell short a call with a higher strike

ABC Stock trading at £5.00

Buy 1 Sep £5.00 call (A), sell short 1 Sep £5.50 call (B) (see pay-off diagram below)

Options - Call Spread

When to use: You think the stock/index will go higher but without exploding on the upside. A popular bullish strategy.
Volatility expectation: Volatility neutral
Profit: Limited to the difference between the two strikes minus net premium cost. Maximum profit occurs where the underlying rises to the level of the higher strike or above.
Loss: Limited to any initial premium paid in establishing the position. Maximum loss occurs where the underlying falls to the level of the lower strike or below.
Breakeven: Reached when the underlying is above the lower strike by the same amount as the net cost of establishing the position.
Time decay: Time decay will hurt.

Trading ideas and tactics:

  • Consider 'legging' into them, buying a call today and selling the higher strike call on a rally in the underlying
  • Often a better way to trade than buying outright calls, no explosive profit potential but far safer returns
  • Look to trade in trending markets
  • Always ask for the trade to be quoted as a spread rather than the two individual options
  • Be aware that if the underlying moves quickly in your favour, the spread might not gain too much, the full profit will be nearer the expiration date
Free Report: How to Learn Spread Betting and Prosper
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