Tag Archives: Bull Call Spread

Options Trading Strategies: The Bull Call Spread

June 15, 2010   admin   No comments

Shares of my favorite DVR service provider, TIVO, surged 5% yesterday on takeover speculation. The suitor for TIVO is rumored to be Direct TV. There are many ways options traders can position for upside in TIVO, the options trade that stood out yesterday involved a purchase of a bull call spread. In the bull call spread options trading strategy an options trader placed an order to buy 1k Jan 11 strike calls for $1.16 and simultaneously sold 1k Jan 17.5 strike calls at $0.34, yielding a net debit of $0.82. The $0.82 paid (total proceeds of $0.82*100*1000 = $82,000) represents the most the options trader can lose in the bull call spread. Maximum profit of $5.68 (or $568,000) is generated with shares of TIVO trading at $17.50 upon January expiration. A P/L payout graph of the TIVO bull call spread options trading strategy is highlighted in the chart below:

The options trader likely purchased a bull call spread instead of outright calls to 1) minimize the impact of implied volatility changes, and 2) to monetize his view that shares of TIVO are unlikely to fetch a price tag much higher than $17.50 in an acquisition. If shares of TIVO blow past that $17.50 strike at option expiration, the option traders’ profit would be limited to the $5.68 mentioned above. A large move higher in TIVO shares between now and expiration would be cause for the options trader to explore closing out the bull call spread at a handsome profit. For more information on the bull call spread and other options trading strategies visit OptionsUniversity.com.

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