Now that we have described how to do a Bull Call Spread, let's go through an example. The call options you are going to use for this are options on the underlying stock: CMGI, Inc. (CMGI).

This example comes from the CallsAndPuts.com "Buy Call Spreads" data. Let's go through the procedures step-by-step. To summarize this option play:



This strategy requires the investor to buy an in-the-money (lower) call option and sell an out-of-the-money (higher) call option on the same stock with the same expiration date. This is also known as a vertical bull call spread. If the stock price closes above the out-of-the-money (higher) call option strike price on the expiration date, then the investor reaches maximum profits.

1) You select CMGI from the "July Bull Call Spreads" listing:

2) You select CMGI based on the criteria you've established for a good Bull Call Spread candidate (This differs for each option investor based on risk versus reward criteria).

3) You access the Stock, Option, BB&RSI links and based on your risk versus reward criteria determine that CMGI is your Bull Call Spread investment choice.

4) Let's also assume that you have an account with ETrade and want to place your option orders for the Bull Call Spread positions.

5) Once you log into your account on www.etrade.com, access the Trading > Enter Option Order link. 

6) Place your option order to sell 5 out-of-the-money (higher) option contracts by selecting the following fields:

7) This sale of the out-of-the-money CMGI call options is for 5 contracts (500 shares) at market price. If you want to have your sale execute at a specific option price, select the "Limit" radial button and enter the price.  

8) Now place your order to buy 5 in-the-money (lower) call option contracts by selecting the following fields:

9) This purchase of the in-the-money CMGI call options is for 5 contracts (500 shares) at market price. If you want to have your purchase execute at a specific option strike price, select the "Limit" radial button and enter the price.  

10) If the stock price decreases below the in-the-money (lower) call option strike price at the expiration date, then the investor has a maximum loss potential of the net debit (premium received for selling the out-of-the-money call premium minus the cost associated to purchase the in-the-money call premium = Net Debit). Maximum profit potential occurs if stock rises above the out-of-the-money (higher) call option strike price.

To summarize:
Net Debit = Money received from selling out-of-the-money calls - Money paid for buying in-the-money calls 
Maximum Profit Potential = Difference between strike prices - Net Debit
Maximum Loss Potential = Net Debit

CoveredCalls.com

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