Bull spread strategy - bull spread

economic-dictionary

A bullish spread strategy is a financial options strategy that seeks to limit both the rises of the underlying asset and the falls, assuming small stable losses if the underlying goes down in exchange for limited gains if the underlying goes up. In English it is known as bull spread strategy.

A bullish spread strategy can be built with both call options and puts options. To explain it, we are going to follow the example with calls. In this way, we would build a bullish spread strategy with calls by buying a call option and selling another call option with a higher strike price (PE) than the previous call to finance ourselves. Normally the call that is bought has a lower price than the current price of the underlying and the option that is sold has a higher price. Let's see it graphically to understand it better:

In this way, if the share price remains stable, we will have earned the premium of the sold option and obtained the value of the purchased option if the exercise price is lower than the final price. If the price of the underlying asset rises, we will win, since the PE of the call we have bought is greater than the call sold, we will obtain a profit, while if the underlying asset falls we will have small losses because we lose the price of the call bought and the benefit of the sold call does not come to compensate it.

The results of this operation will be:

Maximum loss = call premium 1 - call premium 2

Maximum profit = PE2 - PE1 - premium 1 + premium 2

Neutral = PE1 + prime2 - prime1

Example of a bullish spread strategy

Let's suppose that Telefónica's price at the moment is 12 euros. To carry out an upward spread strategy, an investor may buy a call option on Telefónica with a PE of 10 euros and a premium of 2 euros, and at the same time sell an option on Telefónica with a PE of 15 euros in exchange for a premium of 0, 5 euros.

Maximum loss = call premium 1 - call premium 2 = 2 - 0.5 = € 1.5.

Maximum profit = PE2 - PE1 - premium 1 + premium 2 = 15 - 10 - 2 + 0.5 = € 3.5.

Neutral = PE1 + premium2 - premium1 = 10 + 0.5 - 2 = € 11.5.

Tags:  Commerce Business latin america 

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