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 are limited but they are also, however, comparatively cheaper to implement. Additionally, unlike the outright purchase of call options which can only be employed by bullish investors, call spreads can be constructed to profit from a bull, bear or neutral market.
One of the most basic spread strategies to implement 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.
The vertical bull call spread, or simply bull call spread, is used when the option trader thinks that the underlying security's price will rise before the call options expire.
The vertical bear call spread, or simply bear call spread, is employed by the option trader who believes that the price of the underlying security will fall before the call options expire.
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 the neutral calendar call spread or the bull calendar call spread can be employed.
When the option trader's near term outlook on the underlying is neutral, a neutral calendar call spread can be implemented 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.
Investors employing the bull calendar call spread are bullish on the underlying on the long term and are selling the near term calls with the intention of riding the long term calls for a discount and sometimes even for free. Out-of-the-money call options are used to construct the bull calendar call spread.
A diagonal call spread is created when long term call options are bought and near term call options with a higher strike price are sold. The diagonal call spread is actually very similar to the bull calendar call spread. The main difference is that the near term outlook of the diagonal call spread is slightly more bullish.
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