The Basics Bull Call Spread Strategy in Binary Options Trading

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The Basics Bull Call Spread Strategy in Binary Options Trading

By definition, a call option gives you the right, but not the obligation to invest or buy a stock or financial asset at the strike rate before the call gets expired.

For most people with limited capital and who want to take a small risk, this is an excellent way to take part in stock which is expected to increase in value.

But what happens if the call premium is too high? In that case, a bull call spread is a solution.

A bull call spread is a binary options strategy that is associated with the purchase of a call option, and the sale of another option with the same expiration date at the same time.

But, here the strike price will be higher for the latter option.

In a bull call spread, the premium that is received for the call purchased is always higher than the premium paid for the call sold.

It means that the introduction of a bull call strategy usually involves an upfront cost, commonly called as “debit” in the options trading scene.

This is also the reason that a bull call spread strategy is known as a debit call spread strategy.

Selling a call option at a reduced price offsets part of the cost of the purchased call which lowers the overall cost of the position.

But, the action also puts limits its potential profit margins.

How To Profit From A Bull Call Spread Strategy In Binary Options Trading

When it comes to binary options trading, a bull call spread should be considered in the following trading circumstances:

Calls Are Expensive

Traders only consider a bull call spread if the calls are expensive.

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The logic here is that the cash inflow from the short call will fund the price of the long call.

Moderate Upside Of Stocks Is Anticipated

A bull call spread strategy is suitable when investors and traders are expecting the stock price will go up moderately, rather than significant gains.

For investors to get maximum profit from their investments, it would be better for them to hold long calls only on the stocks.

In a bull call spread strategy, the short call caps the gains if the stock appreciates in value substantially.

Risk Is Said To Be Limited

Since a bull call spread strategy is a debit spread, the maximum amount of money an investor might lose is the net premium amount that he or she paid for the position.

Leverage Is Expected

Options are only suitable if there a right amount of leverage is available, and a bull call spread strategy is no exception.

A trader can avail more leverage using a bull call spread instead of purchasing the stock outright for any given amount capital investment.

The Advantages of A Bull Call Spread Strategy In Binary Options Trading

In a bull call spread strategy, the risk is limited only for the total premium paid for the position.

The bull call spread can be designed to fit one’s risk profile.

A conservative trader might be comfortable to opt for a narrow spread in which the differences in call strike prices aren’t set very part apart.

Meanwhile, traders and investors alike who like to take risks may prefer a wider spread to maximize their profit margins, even if it requires them to spend more on the position.

A bull call spread strategy comes with quantifiable and calculated risk-reward profile.

It’s true if the trader’s bullish predictions are correct, there is an opportunity to make substantial gains, but as with all investments and predictions, if it doesn’t work out, the maximum amount of the investments can be lost.

The Risks Of A Bull Call Spread Strategy In Binary Options Trading

Naturally, the success of the bull call spread strategy depends on the accuracy of the investor’s predictions that the price of the stock or financial asset will move, on the strike price of the two options, and on the price difference between the options.

Therefore, the investor should do enough research on the normal price movement of the share, considering into account factors that can influence the whole market and the extent as well as to which changes in the single stock price coincide to those of the entire market.

The trader has the risk of losing the full premium paid for the call spread if the stock or share does not appreciate in price.

The risk, however, can be alleviated by closing the spread before the expiry date, when it’s found that the share is not performing as expected.

This will help the investor and the trader to salvage a part of the capital invested in it.

Selling a call implies that there is an obligation to deliver the stock if you are assigned, and since this can be done by utilizing the long call, a difference of a day or two may exist while settling these trades.

All investors and traders should follow this strategy with a clear understanding of the maximum potential profit and the maximum downside risk.

The contracts and other relevant details of the options should be clear.

The Bull Spread Binary Options Strategy

After acquiring a solid foundation of the basics and terminology used in binary options, the next thing you should know and master are the that will help you increase your profits as well as reduce your risk exposure for each trade. Essentially, to make it in binary options trading, you need to have techniques that will successfully allow you to analyze the market conditions of the underlying assets of binary options. You will soon find out that most strategies utilize a combination of technical and fundamental aspects that are organized to achieve your goal. These techniques can help evaluate factors such as the direction and volatility of price.

At first, we arbitrarily select a binary option without any basis. But again, in order to achieve optimal profits, and to select a binary option proficiently, you need to choose a binary options strategy that must be based primarily on how you want binary options to function for you. Later when you become advanced, you will discover that a binary option trading strategy will only be successful for you if you can utilize it in a way that will let you achieve your investment objectives. For example, you could take advantage of the flexibility of options in order to support your planned speculation portfolio in numerous ways.

Consequently, you will find that it is worth your time to detail your financial plans. You also need to list your major intentions. By doing so, you will filter the number of strategies that may be ideal to you just because only a few of them will be really able to satisfy and achieve your objectives. There are a number of binary options strategies that can be used with this intention in mind. They should be able to help you improve your trading results under a number of different market conditions.

The Bull Spread

In trading, a bull spread option strategy is used by a binary options trader who is looking to profit from an expected rise in the price of an underlying asset. This strategy is employed when the binary options trader expects the underlying asset price to move upwards. A vertical bull spread is a vertical spread where options with a lower striking price are purchased and options with a higher striking price sold. Depending on whether puts or calls are used, the vertical bull spread can be established with a credit or a debit.

Bull Strategy

A binary options trader will require such a strategy if he determines that the price of an underlying asset of the binary option is rising in value. You should then activate a ‘Call’ binary option under these circumstances. An example is stated below.

For this case, let us say that you have news, insider information, or information from your technical analysis that indicates that gold is very likely to increase from its current value of $1,287.00 over the short term. Let’s say that you are also aware that you will be entitled to a 78% profit if you open a ‘call’ binary option using gold as your underlying asset. In addition, you also precisely know your risk exposure because if you finish , you will receive a rebate between 10% and 15%.

Next, choose to deposit an investment of $1000 and opt for an expiry time of 30 minutes. Then simply wait for your information to take its effect and watch the price of gold increase if your information is good. These are all the decisions that you need to make for the bull strategy. When your expiry time expires and if the price of oil is just $1 higher than your opening or strike value, you will earn a profit of $780 in just 30 minutes.

The profit is a great and quick return for what appears to be little risk exposure and minimum effort. However, as with any investment decision, you must ensure that you fully understand your objectives and risks before activating any new trades. In this respect, your goals and risks are as compared to other investment types. Despite all benefits of trading using binary options, you should always work and adhere to a trading strategy.

In the bull spread strategy, it is necessary to assess how high the stock price can go and the time frame in which the rally will occur in order to select the optimal trading strategy. Most bull spread strategies utilizes the simple call buying strategy shown in the example above, and is used by most novice options traders.

Asset prices seldom go up by leaps and bounds. Usually, those who use the bull spread binary options strategy usually set a target price for the bull run and utilize bull spreads to reduce cost. This however, does not reduce risk because the options that end up can still expire worthless, or 10–15% depending on the binary options broker. While maximum profit is capped for these strategies, they usually cost less to employ for a given nominal amount of exposure.

Moderately Bullish Binary Options Strategy

There are also mildly bullish binary options strategies. The bull call spread and the bull put spread are common examples of moderately bullish strategies. Mildly bullish trading strategies are options strategies that make money as long as the underlying asset price does not go down by the option’s expiration. These strategies may provide a small downside protection as well. Predicting covered calls is a good example of such a strategy.

The Bull Call Spread

The bull call spread option trading strategy is used by a binary options trader when he thinks that the price of an underlying asset will go up moderately in the near future. Bull call spreads can be implemented by buying an call option while simultaneously writing a higher striking call option of the same underlying security and the same expiration time.

By shorting the call, the options trader reduces the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price skyrockets. The bull call spread option strategy is also known as the bull call debit spread as a debit is taken upon entering the trade.

The success of the bull call spread naturally depends on the accuracy of the investor’s view of how the share price will move, on the strike price of the two options and on the difference in price between the options. The investor should therefore do adequate research on the likely movement in the share price, taking into account factors that may influence the whole market and the extent to which movements in the individual share price normally correspond to those of the whole market. The investor should go into this strategy with a clear idea of the maximum downside risk and the maximum potential profit, and the details of the option contracts should be clear. Professional advice should be taken if necessary when determining the suitable strike price and expiry date of the two options.

The Bull Put Spread

The bull put spread option trading strategy is used by a binary options trader when he thinks that the price of the underlying asset will go up moderately in the near future. The bull put spread options strategy is also known as the bull put credit spread simply because a credit is received upon entering the trade. Bull put spreads can be implemented by selling a higher striking put option and buying a lower striking put option on the same underlying stock with the same expiration date. You can say that the bull put spread is the opposite of the bull call spread.

For example, if a binary options trader has information that an XYZ stock trading at $45 is going to rally soon, he enters a bull put spread by buying a put for $100 and selling a put for $300. Therefore, the trader receives a net credit of $200 when entering the spread position. If the stock price of XYZ begins to rise and closes at $50 on expiration date, then both options expire worthless but the binary options trader keeps the entire credit of $200 as profit, which is also the maximum profit possible.

But if the price of XYZ had declined to $40 instead, both options expire with the buy having an intrinsic value of $200 and the sell having an intrinsic value of $700. This means that the spread is now worth $500 at expiration. Since the binary options trader had received a credit of $200 when he entered the spread, his net loss comes to $300. This is also his maximum possible loss.

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Bull Spreads

A bull spread option strategy is used by the option trader who is looking to profit from an expected rise in the price of the underlying security.

Vertical Bull Spreads

The vertical bull spread is a vertical spread in which options with a lower striking price are purchased and options with a higher striking price sold. Depending on whether puts or calls are used, the vertical bull spread can be established with a credit or a debit.

Bull Put Credit Spread

A vertical bull spread can be established for a credit if put options are used. The strategy is also known as the bull put spread.

Bull Call Debit Spread

A vertical bull spread can be established for a debit if call options are used. The strategy is also known as the bull call spread.

Horizontal & Diagonal Bull Spreads

The bull calendar spread and the diagonal bull spread are both time spread strategies used by option traders who believe that the price of the underlying security will remain stable in the near term but will eventually rise in the long term.

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    Binarium

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