Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 36

The Bull Call

“In the first trade we’ll learn,” said Nate, “we’re going to follow a debit strategy to optimize a bullish trend, using the two call instruments. We’re going to place a long call and a short call at the same time. And remember that we’re not going to buy the stock. We’re going to create this trade using option instruments only.” (See Figure 36.1.)

“Now if this is a debit strategy, what do we know about these two options we’re using?” asked Aaron.

“Well, we know we’re going to spend more on the long call than we take in on the short call,” answered Shorty. “We’re going to start out in the hole. That’s why it’s called a debit trade.”

“Right,” answered Aaron, “so what does that mean about our strike prices?”

“Well, for one thing” said Lon, “we know that the further a strike price is out of the money, the less expensive it is.”

“Right,” said Aaron, “just as we see in this chain. For every expiration month, the further a strike price is away from being in the money, the less expensive it is.” (See Figure 36.2.)

“So that means,” continued Lon, “that we’re going to place our short call further out of the money than our long call. Because we’re using a debit strategy, we’ll spend more on our long call than we take in on the short call. So the short call has to be further out of the money.”

FIGURE 36.1 The Bull Call

FIGURE 36.2 Relationship between Strike Price ...