With back in bullish mode it’s a good time to run Barchart’s Bull Call Spread Screener.
A bull call spread is an options strategy that a trader uses when they believe the price of an underlying stock will move higher in the short term.
To execute the strategy, a trader would buy a call option and sell a further out-of-the-money call option with the following conditions:
- Both call options must use the same underlying stock
- Both call options must have the same expiration
- Both call options must have the same number of options
Since the strike price of the sold call is higher than the strike price of the bought call, the initial position will be a net debit.
The bull call spread profits as the price of the underlying stock increases, similar to a regular long call.
The difference between a bull call spread and a regular long call is that the upside potential is capped by the short call.
The purpose of the short call is to mitigate some of the overall costs of the strategy at the expense of putting a ceiling on the profits.
Losses are also capped, in this case by the debit taken when you execute the trade.
Let’s take a look at Barchart’s Bull Call Spread Screener for March 25th:
As you can see, the scanner shows some interesting Iron Condor trades on stocks such as NVDA, WMT, AAPL, AMZN, TSM and GOOG.
Let’s adjust the scanner to make sure we are only looking for bull call spreads on stock with a Buy rating and Mark Cap above 40 billion.
This scan gives us the following results:
INTC Bull Call Spread Example
Let’s take a look at the first line item – a bull call spread on Intel (INTC).
This bull call spread trade involves buying the June expiry $24 strike call and selling the $35 strike call.
Buying this spread costs around $2.38 or $238 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
11 – 2.38 x 100 = $862.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 362.19%.
The probability of the trade being successful is 36.7%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
The spread will achieve the maximum profit if INTC closes above $35 on June 20. The maximum loss will occur if INTC closes below $24 on June 20, which would see the trader lose the $238 premium on the trade.
The breakeven point for the Bull Call Spread is $26.38 which is calculated as $24 plus the $2.38 option premium per contract.
The Barchart Technical Opinion rating is a 32% Buy with a weakening short term outlook on maintaining the current direction.
INTC is showing an IV Percentile of 61% and an IV Rank of 44.57%. The current level of implied volatility is 51.14% compared to a 52-week high of 77.90% and a low of 29.62%.
SBUX Bull Call Spread Example
Let’s look at another example, this time using Starbucks (SBUX).
This bull call spread also uses the June expiry and involves buying the $95 strike call and selling the $120 strike call.
This trade would cost $601 and have a maximum potential profit of $1899.
The Barchart Technical Opinion rating is an 8% Buy with a Weakening short term outlook on maintaining the current direction.
SBUX is showing an IV Percentile of 48% and an IV Rank of 27.80%. The current level of implied volatility is 25.56% compared to a 52-week high of 44.34% and a low of 18.32%.
XOM Bull Call Spread Example
Let’s look at one last example, this time using Exxon Mobil (XOM).
This bull call spread also uses the June expiry and involves buying the $115 strike call and selling the $135 strike call.
This trade would cost $510 and have a maximum potential profit of $1,490.
The Barchart Technical Opinion rating is an 8% Buy with a Weakening short term outlook on maintaining the current direction.
The market is in highly overbought territory. Beware of a trend reversal.
XOM is showing an IV Percentile of 13% and an IV Rank of 16.72%. The current level of implied volatility is 19.20% compared to a 52-week high of 29.06% and a low of 17.22%.
Mitigating Risk
Thankfully, bull call spreads are risk defined trades, so they have some build in risk management. The most the INTC example can lose is $238 while the SBUX call spread has risk of $601 and Exxon Mobil has risk of $510.
For each trade consider setting a stop loss of 25-30% of the max loss.
Also keep an eye on key support levels and moving averages.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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