More About Bull Spreads

A few things to remember when doing Bull Spreads. This helped me a lot in keeping straight what this type of trade is doing and why…

The leg to focus on is the position with the more valuable leg. The short position is in effect a hedge!  Having this hedge reduces the cost and risk of the trade. Isolate the more valuable option — that’s what is driving the trade.

So, how do you decide which bullish option strategy to use?  Run the numbers…  The trade with the higher potential return and the lower potential loss is the winner.  Both are bullish option strategies but one uses calls and other puts.  And, one generates a credit to your account; the other a debit from your account.

Bull Call Spread Calculations (Debit Spread)

Max Profit =  Difference in strikes -  the premium
Max Loss =   The premium
Breakeven =  The long leg + premium (remember the short leg is basically a hedge)

Bull Put Spread Calculations (Credit spread)

Max Profit =  The premium (credit you received)
Max Loss =   Difference between the strikes – the premium received
Breakeven =  Strike price of the short put – premium received

This isn’t ALL there is to evaluating which vertical spread is right for a particular trade. But, it will get you most of the way there and is often enough on it’s own.