9. Long Call Spread

  • Vertical debit spread
  • Long OTM Call + Short OTM Call with a higher strike price
  • Giving up any profit that above the strike price of the short call
  • Less max loss [Long Call Premium] - [Credit recieved for the short call]
  • It has to be at same expiration and same number of contracts

Advantages

  • Clear max profit and clear max loss
  • Less time decay
  • Access to expensive underlyings if you don't have enough to only buy the premium of a call

Analysis

  • You buy a call at strike price KL at a premium of CL
  • You sell a call at strike price KS at a premium of CS
  • Your max loss is CL - CS, notice that the long call premium will be greater than the short call premium, because the short call is more OTM than the long call
  • Your max profit is (KS - KL) - (CL - CS), the difference of the strike price (KS is always greater than KL) minus the diference in the premium you recieved and the premium you paid
  • The break even underlying price is [Long Strike Price] + ([Long Call Premium] - [Short Call Premium])
  • This is a bullish strategy because you are buying a call and hedging with a more OTM short call to reduce the max loss of the long call

long_call_spread.png

Example

  • Stock trading at 2000
  • Buy a call at stike price 2100 for 50
  • Sell a call at strike price 2105 for 48
  • 2100/2105 Long call spread initiated for $2
  • Max profit is $3 per share ($300 dollars), because (2105 - 2100) - (50 - 48) = 5 - 2
  • Max loss is $2 per share (cost of the call premium)

long_call_spread2.png

Capital required

  • Buy 100 shares - $200,000
  • Buy 1 2100 call - $5,000
  • Buy 2100/2105 call spread - $200
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Table Of Contents
9. Long Call Spread
Advantages
Analysis
Example