The Bull Vertical Spread Strategy

The bull vertical spread strategy is a very popular strategy for casual investors who wish to enjoy tremendous rates of returns. Unlike trading options outright the bull call spread has the advantage of leveraging the position. The initial outlay for a bull call spread can make room for more positions, meaning greater rates of return, overall.

Take for example, options on the S&P 500. If the market is trading near 1200 and we have two different strike priced options at 800 and 1000, we would  buy the 800 call and sell the 1000 call. This gives a below the market bull call spread. This has a definite maximum loss and maximum gain. Since we know the maximum loss is equivalent to the cost of the position we need to know where the market has to reach in order for us to be profitable or not lose our entire investment.

In this case, since it is already in the money so long as the market stays at or above 1000 we will realize our maximum gain, therefore the cost of the position is near the maximum gain, or else we would have a high probability with a high payoff.