**RG** With options trading, a bull spread refers to a bullish, vertical spread options strategy which is intended to derive or turn a profit in the event of an increase in the price of the underlying. It is possible to construct a bull spread making use of either put options or call options, this is due to the put-call parity. Thus, it is called a bull call spread, when using calls and a bull put spread, when using puts. Bull call spread A bull call spread is established by purchasing a call option which comes with a modest exercise price, and selling at a much higher exercise price. Hence, a bull spread can be ramped up using two call options. Frequently, the call which has the modest price tends to be at-the-money whereas the call which has the higher exercise price will be out-of-the-money. Both calls must have the same underlying security and expiration month. Bull put spread A bull put spread is attained through trading higher striking in-the-money put options at the same time purchasing an equivalent amount of lower striking in-the-money put options on the same underlying security which comes with the exact expiration date. In this case, the trader hopes that the rising price of the underlying security renders the written put options worthless on expiry. Regardless of whether a cash settlement occurs or the underlying is delivered, all the crucial events are laid out the contract. In essence, it is a contract that permits its holder to buy the instrument in question, then known as the underlying at a preset price (exercise price, also called strike) at a specific date called the date of maturity of the call. The buyer of a call option expects a rise in the price as regards the underlying instrument at some stage in the future. Whereas the seller may expect a decline, or is keen on giving up some of the profit as a result of price increase in favor of the premium (paid off instantly). Whilst keeping the chance to derive a profit up to the strike price. The purchaser can earn more profit with the call option in the event that the underlying instrument ascends, thus drawing the price of the underlying instrument nearer to the strike price. At the same time the risk is limited to the premium, the buyer's profit has the capacity to be significantly high. The option drifts into a state of being 'in the money' whenever the price of the underlying instrument exceeds the strike price. The buyer of a call option is in the so-called long-call position, he pays an option premium and it is calculated in a specific way. A zero-strike call or standard tracker relates to a call option with strike price zero of the underlying referenced. In contrast to the investment in a stock, the investor receives no dividend.
Pages to are hidden for
"Introduction to the Bull spread"Please download to view full document