Bull Call Spread - Bullish Strategy

Bull Call Spread:

Bull Call Spread is an option trading strategy used when option trader is moderately bullish in the market and expects the underlying to give decent returns in near term.

A Bull Call Spread is formed by buying an “In-the-Money Call Option” (lower strike) and selling an “Out-of- the-Money Call Option” (higher strike). Both the call options must have the same underlying security and expiration month.

The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long Call) strategy.

The investor will benefit if the underlying Stock/Index rallies. However, the risk is limited on the downside if the underlying Stock/Index makes a correction.

Investor view: Moderately bullish on the Stock/ Index.

Risk: Limited.

Reward: Limited to the net premium paid.

Breakeven: Strike price of Purchased Call + net premium paid.

Illustration



Bull Call Spread payoff Diagram



Index	Nifty
Nifty Lot Size	50
ITM Call Option	Nifty May 5600 Call Purchased @ Rs 122/-
OTM Call Option	Nifty May 5700 Call Sold @ Rs 74/-
Total Premium Paid	Rs 48 (122-74)
Breakeven Point	Strike Price of Purchase Call + Net Premium Paid

Reward Potential

Ø  Maximum Profit = Short Call Strike Price – Strike Price of Purchased call – Net Premium Paid (When both option exercised)

Ø  Profit Achieved When Nifty Settlement Price >= Strike Price of Short Call

Risk Potential

Ø  Maximum Loss = Net Premium paid (When both options unexercised)

Ø  Max Loss, when Nifty Settlement Price <= Strike Price of Purchased call

Nifty Closing Price @	Profit/Loss
5400	2400   (Loss)
5500	2400   (Loss)
5600	2400   (Loss)
5700	2600   (Profit)
5800	12600 (Profit)

Let us assume Nifty is trading at 5816 in May 2013.An options trader setups a bull call spread by buying a Nifty May 5600 put for Rs 122 and sells  a Nifty 5700 May call for Rs 74. The net debit taken to enter the trade is Rs 2400 ((122-74) X 50 Lot Size)

Scenario 1 :  At Expiry if Nifty dips down to 5500 , both the call option expires out of the money resulting in overall loss of Premium paid of Rs 2400/-

Scenario 2: Let us assume nifty if Trading at 5800 levels , Nifty 5600 Call option would be having an Intrinsic Value of Rs 200 and nifty 5700 Call Option Sold will be having an intrinsic value of Rs 100/- , resulting in Rs 300/- as profit in overall spread but since the option trade has already paid of premium of Rs 48 to enter the trade , Overall Profit if Rs 300-48 = 12600/- (252 X 50 Lot Size)

Synthetic Long Futures - Bullish Strategy

Synthetic Long Futures

Long Synthetic Futures is a strategy to be used when the investor is bullish on the market direction.

The investor buys an at-the-money call option and sells an at-the-money put option for the same amount of the underlying security, and is able to profit from an upward price movement.

Long Synthetic is a a position which is long (Nifty Apr Call Option Strike Price 5700) and short (Nifty Apr Put Option Strike Price 5700) will always result in purchasing the underlying asset for 5700 at exercise or expiration. If Nifty Futures is above 5700, the call is in the money and will be exercised; if Nifty Futures is below 5700 then the short put position will be assigned, resulting in a (forced) purchase of the underlying at 5700.

Long Synthetic behaves exactly the same as being long on the underlying security.It has the benefit of being much cheaper than buying the underlying outright.

Investor View: Bullish on direction of the Stock / Index.

Risk: Unlimited.

Reward: Unlimited.

Breakeven: Nifty Strike Price +/- net premium paid or received.

Illustration



Synthetic Long Futures



Index	Nifty
Nifty Lot Size	50
Underlying Strike Price	5700
ATM Call Premium	Rs 60    (Call Premium Paid)
ATM Put Premium	Rs 45    (Put Premium Received)
Breakeven Point	5715 (Nifty Strike Price + Net Premium Paid)

Reward Potential

Ø  Maximum Profit = Unlimited

Ø  Profit Achieved When Settlement Price of Nifty > Strike Price of call Option + Net Premium Paid (Rs 60 Call option – Rs 45 Put option)

Ø  Profit = Settlement Price of Nifty – Strike Price of Call Option - Premium Paid

Risk Potential

                                               

Ø  Max Loss = Unlimited

Ø  Loss occurs= When Settlement Price of Nifty < Strike Price of Put Option i.e 5700 + Net Premium Paid i.e Rs 15

Ø  Loss = Strike Price of Put Option – Nifty Settlement Price + Net Premium Paid

Nifty Closing Price @	Profit/Loss
5500	10750 (Loss)
5600	5750 (Loss)
5700	750 (Loss)
5800	4250 (Profit)
5900	9250 (Profit)

Example 1 : Nifty @ 5800

Let us assume Nifty is trading at 5800 on Expiry date,

Call Option will remain in the money and have an intrinsic value of Rs 5000 ((Nifty Settlement Value i.e 5800 – Nifty Call Option Strike Price i.e. 5700) X 50 Lot Size) reducing the premium paid of Rs 60 for call option.

Overall Profit for Long Call Option would be Rs 2000/- (Rs 5000 (Intrinsic Value)- Rs 3000 (Call option premium paid)

Nifty Apr 5700 Put option sold at Rs 45 is out of the money and expires worthless resulting in overall gain of Rs 2250/- (45 X 50 Lot Size)

Total gain is Rs 2000 + Rs 2250 = Rs 4250

Example 2 : Nifty @ 5600

Let us assume Nifty is trading at 5600 on Expiry date,

Put Option will remain in the money and have an intrinsic value of Rs 5000 ((Nifty Put Option Strike Price i.e. 5700 - Nifty Settlement Value i.e 5600 –) X 50 Lot Size) reducing the premium received of Rs 45 for put option.

Overall loss for Short Put Option is Rs 2750/- (Rs 5000 (Intrinsic Value)- Rs 2250 (Put option premium received)

Nifty Apr 5700 Call option purchased at Rs 60 is out of the money and expires worthless resulting in overall loss of Rs 3000/- (60 X 50 Lot Size)

Total Loss is Rs 2750 + Rs 3000 = Rs 5750

Synthetic Long Put

Synthetic Long Put

Synthetic Long Put is a strategy to be used when the option trades is concerned Bearish to very bearish sentiment in market

This strategy involves buying a at-the-money Call Option, while Selling shares in the same underlying or Index, it is a strategy with a limited loss and unlimited profit.

An investor often employs a synthetic long put strategy to profit from the severe fall in the underlying’s price, however, as with any short sale, there is always a risk of being forced to return the stock.

Nifty Synthetic Long Put

Sell 1 lot Nifty Futures or Stock

Buy 1 ATM Index Call

Investor View: Bearish to very bearish on direction of the Stock / Index.

Risk: Limited

Reward: Unlimited.

Breakeven:  Underlying Short Sale Price – Premium Paid

Illustration

Index	Nifty
Nifty Lot Size	50
Nifty Sold Price	5580
Nifty Call Strike Price	5600
Call Premium	Rs 70    (Call Premium Paid)
Breakeven point	Selling Price of Nifty - Premium Paid

Reward Potential

Ø  Profit = Unlimited

Ø  Profit Achieved When Settlement Price of Nifty < Selling Price of Nifty i.e. 5580 - Call Option Premium i.e.70

Ø  Maximum Profit = Selling price of Nifty - Settlement Price of Nifty – Premium Paid

Risk Potential

                                               

Ø  Max Loss = Call Option Premium Paid + Brokerage(s) + Statutory Charges

Ø  Loss occurs= When Settlement Price of Nifty = Strike Price of Call Option i.e 5600

Nifty Closing Price @	Profit/Loss
5400	5500 (Profit)
5500	500 (Profit)
5600	4500 (loss)
5700	4500 (Loss)
5800	4500 (Loss)

Example:

Let us assume Nifty is trading at 5500 in Apr 2013. An investor by buy Apr 5600 Call Option for Rs 70/- and a Nifty Apr Futures Sold for Rs 5580. The net premium paid to enter the trade is Rs 3500 ((Call Option Premium) X 50 Lot size) and difference or Rs 20/- for nifty futures sold @ 5580 which is Rs 4500 maximum possible loss.

If Nifty is trading at 5500 on expiration in April, the Apr 5600 Call will expires out of the money and, Subtracting the premium paid of Rs 70, Nifty Short Futures will yield a profit of Rs 80 but at the same time Call Option premium would be in a loss of Rs 70 resulting in overall profit of Rs 10

On expiration in April, if Nifty is trading at 5700, Call option will remain in the money and earn Rs 100 and futures position would have a loss of Rs 6000/- (5700 – 5580 X 50 Lot size) reducing the premium paid of Rs 3500 (70 X 50 per lot).

 Investor will make a loss of

Nifty Short Futures : Rs 6000 Loss (Nifty Sold Price – Nifty Settlement Value ) X 50 Lot Size

Nifty 5500 Call       : Rs 1500 Profit (Exercised Value Rs 100 – Premium Paid Rs 70) X 50 Lot Size

Synthetic Long Call

Synthetic Long Call

Synthetic Long Synthetic is a strategy to be used when the option trades is concerned about the near term downside risk

This strategy involves buying a Put Option, while owning shares in the same underlying or Index , it is a strategy with a limited loss and (after subtracting the Put premium) unlimited profit.

Long Synthetic behaves exactly the same as being a long call

Nifty Synthetic Long Call

Buy 1 lot Nifty Futures or Stock

Buy 1 ATM Index Put

Investor View: Bullish on direction of the Stock / Index.

Risk: Limited

Reward: Unlimited.

Higher Breakeven:  Purchase Price or Index/Stock + Put Premium paid + brokerage + Statutory charges

Illustration

Index	Nifty
Nifty Lot Size	50
Nifty Spot Price	5580
Nifty Put Strike Price	5600
Put Premium	Rs 70    (Put Premium Paid)
Breakeven point	Purchase Price of Nifty + Premium Paid

Reward Potential

• Profit = Unlimited
• Profit Achieved When Settlement Price of Nifty > Purchase Price of Nifty i.e. 5580 + Put Option Premium i.e.70
• Maximum Profit = Settlement Price of Nifty – Purchase price of Nifty – Premium Paid

Risk Potential

•  Max Loss = Put Option Premium Paid + Brokerage(s) + Statutory Charges
•  Loss occurs= When Settlement Price of Nifty <= Strike Price of Put Purchased i.e 5600

Nifty Closing Price @	Profit/Loss
5400	3500 (Loss)
5500	3500 (Loss)
5600	3500 (Loss)
5700	2500 (Profit)
5800	7500 (Profit)

Example:

Let us assume Nifty is trading at 5500 in Apr 2013. An investor by buy Apr 5500 put for Rs 70/- and a Nifty Apr Futures for Rs 5580. The net premium paid to enter the trade is Rs 2500 ((Put Option Premium) X 50 Lot size), which is also his maximum possible loss.

If Nifty is trading at 5500 on expiration in April, the Apr 5600 put will expires in the money and will possess intrinsic value of Rs 100, Subtracting the premium paid of Rs 70, Put option will yield a profit of Rs 30 but at the same time Futures position would be in a loss of Rs 30 resulting in overall loss of premium paid

On expiration in April, if Nifty is trading at 5700, Put option will expire worthless and futures position would yield a profit of Rs 6000/- (5700 – 5580 X 50 Lot size) reducing the premium paid of Rs 3500 (70 X 50 per lot) , Investor will make a profit of Rs 2500/-