A bull call spread strategy is an option strategy that traders implement when they are “moderately” bullish on a stock or an index. In this strategy, traders buy an ATM (at-the-money) call option and sell an OTM (out-of-the-money) call option to reduce their cost.
Let’s see how this strategy works
Background
Titan reported a net profit of ₹641 crore, a growth of 222% year on year. Its total income rose 64% to ₹7,220 crore, aided by a strong recovery in demand across its key business segments.
Titan’s stores were fully operational during the quarter, and store expansion has also gained traction. The company's jewellery business witnessed a demand resurgence and registered a growth of 77% to ₹6,106 crore.
The management said that the company is witnessing market share gains across every region and city.
Derivatives build-up
After touching the recent highs of ₹2,440 early this month, the stock corrected to ₹2,205 in the market fall. It has now bounced back and is trading at ₹2,330 levels.
The December 2,400 strike price call option has a significant base suggesting that the stock can face resistance at this price.
This is about 3% higher than the current price of ₹2,330.
The lot size in the F&O contract is 375 shares per lot.
Action
Traders willing to take a moderately bullish position on it tend to initiate a bull call spread strategy that involves buying an ATM (at-the-money) call option of 2,340 strike price (December expiry) at ₹28 and selling an OTM (out-of-the-money) call option of 2,400 strike price (December expiry) at ₹12.
Now, if the stocks moves higher and closes at ₹2,400 levels on expiry, the trader will make a profit of ₹16,500 [Profit on long call option: (32 * 375 = 12,000) + profit on short call option: (12 * 375 = 4,500)].
However, at the price of ₹2,400, the profit is capped at ₹16,500 because above this rate every one rupee increase in premium of the long call position will be offset by a one rupee increase in premium of the short call position.
The break-even point of this strategy is calculated by adding the ATM (at-the-money) strike price (2,340) and the net premium paid (28 - 12 = 16). In this case, the break-even point is ₹2,356 (2,340 + 16). If the stock closes at ₹2,356 on expiry, the trader will have neither incurred a profit nor a loss.
In case the stock goes down, say below ₹2,340 levels, the trader's loss is limited to a net premium paid of ₹6,000 (16 * 375).
This strategy has a favourable profit to loss payoff of nearly 2.7:1, which tends to work in the favour of the trader.
We hope this strategy was simple and easy to understand. You can try spotting it on the option chain and see if you are able to identify levels.
We’ll bring you a lot of strategies that will help you to identify trade setups easily.
Until then, happy trading!
About the author: Kush Bohra is a SEBI-registered investment advisor and an F&O expert.
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Disclaimer:
Derivatives trading must be done only by traders who fully understand the risks associated with them and strictly apply risk mechanisms like stop-losses.
We do not recommend any particular stock. The stock names mentioned in this article are purely for showing how to do analysis. Take your own decision before investing.