Spread options refer to buying and selling options on the same expiration date. Bull market spread options are usually used in conservative and bullish situations to reduce costs
There are two strategies for bull spread options:
- Debit spread: Buy a low-priced call option and sell high-priced call options on the same expiration date. When the stock price exceeds the exercise price of the high-priced option, the maximum profit can be achieved; the maximum profit is the difference between the two options exercise price multiplied by 100 Subtract the premium paid for purchasing this strategy.
- Credit spread: buying a low-priced put option and selling high-priced put options on the same expiration date. When the stock price closes at the exercise price of the high-priced option, the maximum return can be reached; the maximum return is the income from trading the spread option (Credit).
Examples of advanced usage scenarios:
- The buyer holds a call option with an exercise price of $20 for X stock that expires in January. When the stock price is $22, the buyer buys this option with $300 ($3 per stock value). But now the stock price drops to $18, this option only worths $150 ($1.5 per stock value). As a remedy of losses, the buyer then sells two call options for X stocks that expire in January with an exercise price of $20, and at the same time purchases an option for X stock that expires in January with an exercise price of $15. At this time, the buyer’s holding position is a long call option of $15 in January and a short call option of $20 in January. This combination is called a bull market spread option.
- The original strategy (one naked call option with an exercise price of $20) will require the stock price reaching $23 to maintain a breakeven at maturity date. Under the bull spread strategy, the stock price only needs to reach 18 yuan on the maturity date to be able to balance the cost.