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Call Spreads

A call spread is an option spread strategy that is created when equal number of call options are bought and sold simultaneously. Unlike the call buying strategy which have unlimited profit potential, the maximum profit generated by call spreads is limited but they are also comparatively cheaper to enter. Call spreads can be constructed to profit from a bull, bear or neutral market.

Vertical Call Spread

One of the most basic spread strategies in options trading is the vertical spread. A vertical call spread is created when the short calls and the long calls have the same expiration date but different strike prices. Vertical call spreads can be bullish or bearish.

Bull Vertical Call Spread

The vertical bull call spread or, bull call spread, is used when the option trader thinks that the underlying will rise before the call options expire.

Bear Vertical Call Spread

The vertical bear call spread or, bear call spread, is used when the option trader believes the price of the underlying will fall before the call options expire.

Calendar (Horizontal) Call Spread

A calendar call spread is created when long term call options are bought and near term call options with the same strike price are sold. Depending on the near term outlook, either a neutral calendar call spread or a bull calendar call spread can be created.

Neutral Calendar Call Spread

When the option trader's near term outlook on the underlying is neutral, a neutral calendar call spread can be created using at-the-money call options to construct the spread. The main objective of the neutral calendar call spread strategy is to profit from the rapid time decay of the near term options.

Bull Calendar Call Spread

Investors employing the bull calendar call spread are bullish on the underlying on the long term and bearish or neutral in the short term. They sell the near term calls with the intention of getting the long term calls for a discount. Out-of-the-money call options are used to construct the bull calendar call spread.

Diagonal Call Spread

A diagonal call spread is entered when long term call options are bought and near term call options with a higher strike price are sold. The diagonal call spread is very similar to the bull calendar call spread. The main difference is that the near term outlook of the diagonal call spread is more bullish.


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