Bull Call Spread, efficient Options strategy for short term bullish view

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Options buying as we all know is a convenient way to trade bullish or bearish view. When the view is bullish, we can simply buy a Call Option. However, many of us have faced difficulty with buying options when we are trading with a 3-5 sessions (Short Term) view. The reason behind this is that Options have a crucial element of Time Value Impact.

What is Time Value Impact?

Time value impact is the fact that Option premium reduces in value as the time passes by. This means that if there is no movement in stock/index, even then there will be a reduction in value of the option premium. This element of reduction is called Time Value Impact. This is very hurtful if we are option buyers.

Especially when we buy Call Option with a view to hold it for 3-5 trading sessions (short term). A lot of positive impact of our winning trade gets taken away due to negative Time Value Impact. This negative impact reduces efficiency of short term options trading by simply buying option.

Solution for making it efficient: Bull Call Spread

What is Bull Call Spread?

Bull Call Spread is a bullish strategy that is executed by buying a call and selling higher strike call to fund it. It is a strategy with limited risk and limited reward.

What is Maximum profit?

Maximum profit is limited to difference in buy & sell strike less net premium paid (Buy Option Premium – Sell Option Premium). Maximum Profit arises if the stock/index closes at or above the higher strike.

What is Maximum Loss?

Maximum risk is limited to net premium paid. Breakeven for the strategy would be lower strike + net premium paid.

Which Strikes to select?

Buy Call can be Strike close to the current market price and Sell Call Strike can be above the expected target in short term.

Example:

Stock A is trading at Rs 100. We are bullish on the stock with short term target of 104. As a trader we also have a stop loss of 98.

Available Strikes: 95, 98.5, 100, 102.5, 105, 107.5

Bull Call Spread:

Buy 100 Call (Close to Current Market Price)

Sell 105 Call (Close to the expected target)

Important Points:

1. Remember, we are trading only for 3-5 sessions and not for the entire expiry. So, we may not achieve maximum profit if the stock goes up to 105 during the expiry. At the same time, we might not have maximum loss if the stock reaches our stop loss level during the expiry.

Booking Profit in the position by Selling the Bought Call Option and Buying Back the Sold Call Option within short term may not be equal to maximum profit but it would be much higher than the loss at 98. This makes it much more efficient.

2. Unlike Buying a Call, Bull Call Spread strategy requires Margin to be given to the exchange. On the other hand, Premium paid & maximum loss in Bull Call Spread is much lower than the Buy Call trade.

Thus, trade bullish view in short term efficiently with Bull Call Spread by reducing negative Time Value impact.