It usually involves buying at the money call options and selling out of the money call options with the same expiration date.
When you entered into this spread, you are moderately bullish on the underlying stock and are looking for a way to profit from a bullish move at a reasonable cost. This is because if a trader is very bullish, he would have bought a call option outright and gain a potentially unlimited profit. It is preferably to trade this option trading strategy with at least 3 months to expiration so as to give yourself more time to be right.
You should pick the strike price and time frame of the spread according to your risk profile and forecast. The net effect of using this option spread strategy is to lower the cost and breakeven of the trade compare to buying a call option outright. Selecting the option trading strategies with appropriate risk-reward parameters is important to your long term success in trading spread.
Maximum profit arises only if the underlying stock rises to the higher of the 2 strike price selected.Exiting the TradeSimply offset the spread by buying back the call options that you sold and selling the call options that you have bought in the first place.
As the underlying stock fluctuate up and down, advance option traders may choose to unravel the spread leg by leg.
The short leg of the spread reduces your cost and increase the leverage, though at the expense of capping the maximum profit. In this way, the trader will leave one leg of the spread exposed while he profit from the closure of the other leg.
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