With major indexes getting back above their 50-day moving averages, it’s a good time to run the Bull Call Spread Screener.
A bull call spread is an options strategy that a trader uses when they believe the price of an underlying stock will move higher in the short term.
To execute the strategy, a trader would buy a call option and sell a further out-of-the-money call option with the following conditions:
- Both call options must use the same underlying stock
- Both call options must have the same expiration
- Both call options must have the same number of options
Since the strike price of the sold call is higher than the strike price of the bought call, the initial position will be a net debit.
The bull call spread profits as the price of the underlying stock increases, similar to a regular long call.
The difference between a bull call spread and a regular long call is that the upside potential is capped by the short call.
The purpose of the short call is to mitigate some of the overall costs of the strategy at the expense of putting a ceiling on the profits.
Losses are also capped, in this case by the debit taken when you execute the trade.
Let’s take a look at Barchart’s Bull Call Spread Screener for August 31st:
As you can see, the scanner shows some interesting Iron Condor trades on stocks such as NIO, PLTR, F, AAPL, MSFT, NVDA, AMZN and AMD.
Let’s adjust the scanner to make sure we are only looking for bull call spreads on stock with a Buy rating and Mark Cap above 40 billion.
This scan gives us the following results:
AAPL Bull Call Spread Example
Let’s take a look at the first line item – a bull call spread on AAPL.
This bull call spread trade involves buying the November expiry $185 strike call and selling the $225 strike call.
Buying this spread costs around 10.16 or $1,016 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
40 – 10.16 x 100 = $2,984.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 293.70%.
The probability of the trade being successful is 35.1%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
The spread will achieve the maximum profit if AAPL closes above 225 on November 17. The maximum loss will occur if AAPL closes below $185 on November 17, which would see the trader lose the $1,016 premium on the trade.
The breakeven point for the Bull Call Spread is $195.16 which is calculated as $185 plus the $10.16 option premium per contract.
The Barchart Technical Opinion rating is a 64% Buy with a Weakening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is in highly overbought territory. Beware of a trend reversal.
AAPL is showing an IV Percentile of 6% and an IV Rank of 7.86%. The current level of implied volatility is 19.55% compared to a 52-week high of 44.98% and a low of 17.38%.
MSFT Bull Call Spread Example
Let’s look at another example, this time using Microsoft.
This bull call spread also uses the November expiry and involves buying the $320 strike call and selling the $400 strike call.
This trade would cost $2,187 and have a maximum potential profit of $5,813.
The Barchart Technical Opinion rating is a 56% Buy with a Weakening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
MSFT is showing an IV Percentile of 1% and an IV Rank of 3.87%. The current level of implied volatility is 20.18% compared to a 52-week high of 44.98% and a low of 19.19%.
Mitigating Risk
Thankfully, bull call spreads are risk defined trades, so they have some build in risk management. The most the AAPL example can lose is $1,016 while the MSFT call spread has risk of $2,187.
For each trade consider setting a stop loss of 25-30% of the max loss.
Also keep an eye on key support levels and moving averages.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
