Option strategy

1. Option Strategy
—Bull Call Spread
Mengxuan Wang(Delia)
931-967-482

2. Roadmap
• Intro to Vertical Spreads
• What is the Bull Call Spread? When is this strategy appropriate?
• Implication Example(TICKER: BABA)
• Profit/ Loss Graph
• Risk and Reward Characteristics
• References

3. Introduction to Vertical Spread
•Define the Vertical Spread
A vertical spread is the simultaneous purchase and
sale of options at different strike prices and/ or
different contract months.
•With a vertical spread, you will be chasing an
option at one-strike price and selling an option at
another strike price at the same time.

4. To understand vertical spreads better, we
will start with the bull call spread since
most bull call spreads are vertical spreads.

5. Bull Call Spread
• Purchase a call option at a lower strike price and Sell a call option at
a higher strike price(both calls have the same expiration date)
• This strategy is used when investors expect a moderate increase in
the price of the underlying asset before the options expired
• Maximum Profit
= Higher strike price – Lower strike price – net cost of options
• Maximum Risk
occur when the underlying asset price < lower strike price
• Break-even Point
= Lower strike price + net cost of options

6. Implication Example(Ticker:BABA)
• Background: Alibaba just launched its IPO and this company has
potential profitability since it is the largest online retailer in China.
During the January in China, people usually start to buy a lot of new
products to celebrate the Spring Festival(similar to the Christmas in
the U.S.). Therefore, I would expect the stock price of Alibaba will
moderately increase during that particular month.
• I want to profit from this opportunity by using the Bull Call Spread!
• Current BABA stock price: $84.95 per share
• Position: Purchase BABA 90 call for $4 ,which expired on Jan 17 2015
& Sell BABA 95 call for $2.64 ,which also expired on Jan 17 2015
Net initial CF = -4+2.64= - $1.36

7. Profit/Loss Graph
Profit / Loss ($)
Spot price at
Break-even expiration($)
point = $91.36

8. Risk and Reward Characteristics
• Benefits:
Limited loss
Low initial investment(Premium long call can be financed by
collecting premium short call)
• Risks:
Limited potential profit
Underlying asset price fall below even the lower strike price
As market move toward expiration, Time Value of options decay

9. References
Johnson, R. (2009). Introduction to derivatives: Options, futures, and
swaps. New York: Oxford University Press.
Kraus, K. (2006). Start trading options: A self-teaching guide for
trading options profitably. New York: McGraw-Hill.
Smith, C. (2008). Option strategies profit-making techniques for stock,
stock index, and commodity options (3rd ed.). Hoboken, N.J.: Wiley.

10. Thank you!