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9. Bull Spread
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Scenario:
The trader feels bullish on Lumber, but volatility is in question. He could try futures as an alternative, but wants the comfort of a limited loss position. He decides on a bull spread with the higher strike written at the top of his expected trading range of 210.
Specifics:
| Underlying Futures Contract: | November Lumber | |
| Futures Price Level: | 193.00 | |
| Days to Futures Expiration: | 60 | |
| Days to Options Expiration: | 40 | |
| Option Implied Volatility: | 18.6% | |
| Option Position: | Long 1 Nov 200 Call | - 2.10 ($315) |
| Short 1 Nov 210 Call | + 0.50 ($ 75) | |
| - 1.60 ($240) |
At Expiration:
| Breakeven: | 201.60 (200.00 strike + 1.60 debit) | |
| Loss Risk: | Limited to premium paid. Losses increase below 201.60 to a maximum loss below 200.00 of 1.60 ($240). | |
| Potential Gain: | Limited to difference between strikes less debit paid (10.00 - 1.60) 8.40 ($12,600). Gains mount above 201.60 with maximum profit at 210.00. | |
Things to Watch:
Volatility changes affect this spread very little. Therefore, if the trader has an opinion on volatility, one of the other strategies may work better. Check the next page for follow-up strategies.
Follow-up Trading Strategies
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