Bull Vertical Spread
Categories: Trading, Derivatives, Banking, Managed Funds, Stocks
No, this is not some weird sequel magazine to Playboy.
Instead, if you are feeling bullish about a particular stock, commodity, or futures option, but want to limit the downside potential if you're wrong, implementing a bull vertical spread might be a solution.
In this scenario, the investor purchases and sells the same options with the same class and expiration month, but with different strike prices (the prices at which options can be exercised). When the option sold is more expensive than the option bought, a net profit results.
For example, a stock is now trading at $12 per share; an investor purchases a call option with a strike price of $19, and sells another call option with a strike price of $27. Since the investor wrote a call option with a strike price of $27, if the price of the stock jumps up to $34, the investor is obligated to provide shares to the buyer of the short call at $27. This is where the purchased call option allows the trader to buy the shares at $19 and sell them for $27, rather than buying the share at the market price of $34 and selling them for a loss.
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