Bull price spread (vertical bull spread)

Market expectation

A bull price spread is a good option if prices are expected to rise slightly. An increase above the base price E2 is not expected.

You should choose your puts depending on your market expectations. The more positive these expectations are, the further the puts may be "in-the-money" when sold.

Construction

Price spreads consist either only of puts or only of calls. A long and a short position are taken on the same type of option, i.e. the options differ only in the strike price, not in the term.

In addition to the bull price spread with calls as in the example above, there is also the bull price spread with puts. Here too, the put with the lower strike price is bought and the put with the higher strike price is sold. The result is the same profit profile.

Profit potential

Bull price spreads with calls initially require the use of capital in the amount of the difference between the two premiums, as the call short always flows in with the lower premium (higher strike price) than the call long.

The break-even point for the bull price spread with calls is the lower strike price E1 plus the difference in option premiums.

The maximum profit is the difference between the two strike prices minus the difference between the two premiums if the underlying is quoted higher than E2.

In the case of bull price spreads with puts, on the other hand, you initially receive the difference between the two premiums, as the put with the higher strike price is more expensive.

The break-even point for the bull price spread with puts is the higher strike price E1 minus the difference (received) in option premiums.

The maximum profit for bull price spread with puts is the difference between the two premiums received if the underlying is quoted higher than E2.

Risk of loss

The maximum loss is limited, because if the price falls below E1, the loss does not increase any further.

In the case of bull price spreads with calls, both warrants expire worthless and the loss corresponds to the difference between the original premiums.

For bull price spreads with puts, the maximum loss is the difference between the two strike prices minus the difference (received) in the original premiums.

Time effect

The time effect cannot be specified precisely, as it depends crucially on the price of the underlying asset. If the share price is negative (price below break-even), the time effect is negative; if the price is above break-even, the time effect is positive.

Volatility effect

The volatility effect of the overall position is neutral, although of course the two warrants react. However, since there is a long and a short position of the same maturity for each option type, the change in volatility has no effect.