Bull Call Spread on Apple ( AAPL ) vs Purchasing a Call
Let's say that you have a moderately bullish bias toward a stock (we will use Apple ( AAPL ) in this example) and the overall market is slightly bullish. Is there a way that you can take advantage of this investing scenario while limiting risk? Certainly, there are a few. One that is often superior to the rest is the bull call spread.
When executing a bull call, you purchase call options at one strike and sell the same number of calls on the same company at a higher strike with the same expiration date. In this case you would purchase APPL February 2010 calls at the 210 at-the-money strike at the ask price of $10.30. You would then sell the same number of February 2010 calls with a higher strike price, in this case 230 at the bid, $5.90.
Your maximum profit in the bull call spread is limited, you can make as much as the difference between the strike prices less the net debit paid. For simplicity, let's assume that you purchased one AAPL Feb 210 call and sold one AAPL Feb 230 call resulting in a net debit of $4.10 (that's $10.30 - $5.90). The difference in the strike prices is $20 (230 - 210). You, therefore, subtract 5.90 from 20 to end up with a maximum profit of $14.10 per contract. So, if you traded 10 contracts, you could make $14,100.
Although you limited your upside, you also limited the downside to [...]
**Content is contributed independently by Dan Passarelli's Market Taker Mentoring. marketHEIST.com is not responsible for any comments or opinions stated in this post.**
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