How Can a Bull Call Spread Potentially Profit from a Limited Increase: A Case Study of TUTU Company

The Bull Call Spread may be appropriate when investors anticipate a limited increase in a security's price.
Today we'll take a hypothetical company TUTU as an example and look at how this strategy could be used in real trading.

【Strategy Introduction】

1. Construction of the strategy

Buy Call 1 + Sell Call 2

2. Practical Scenarios

You may consider using the Bull Call Spread strategy if you expect a limited increase in the underlying asset price.

【Case Study】

Let's go over a hypothetical case study to help illustrate how this strategy could work.
Expectation: Suppose there is good news for TUTU stock. Bob believes the stock price will go up, but within a limited range, so he decides to use a bull call spread.

1. Open position

Let's break down this two-part strategy.

(1) Buy a Call 1
Bob buys a call at $5 with a strike price of $50 that expires on 22/04/2023.
Net Premium Paid Per Share = $5

(2) Sell a Call 2
On the other hand, Bobs sells a call for $2 with a strike price of $58 that expires on 22/04/2023.
Net Premium Received Per Share = $2

Total Cost of Bull Call Spread = Net Premium Paid Per Share * Multiplier * Contract Size=（$5-$2）*100*1 = $300

(Note: All data used is for educational purposes only and does not constitute any investment suggestions or recommendations. Past performance is not indicative of future results.)

2. Strategy Analysis

Let's discuss the three possible scenarios with this options strategy: break-even, maximum loss, and maximum gain.

The following is the P/L diagram of the strategy.
From the chart, it is clear that the maximum profit is $500 and the maximum loss is $300.

（Note: All profits and losses below are calculated based on the assumption that you choose to exercise the option at expiration, excluding commissions and other charges. In real trading, you can either exercise your option or close your position before expiration, and the actual profit and loss will vary.）

3. Features of the Strategy

① Limited loss
The strategy caps the loss, with the maximum potential loss being the net premium paid. This is realized if the underlying stock price is trading below Call 1's strike price at expiration.

② Limited gain
Simultaneously, this strategy also limits the return. The maximum potential profit is realized if the stock price is at or above the strike price of Call 2.

4. Factors to consider

When using this strategy, you should bear in mind that it may not be applicable to all underlying assets and any investment involves risks. Here are some other factors for you to consider:

① Strike price
Conservative: Conservative investors may buy and sell both in-the-money calls. In this way, there is a higher probability the options will expire in the money, but this also requires a higher initial premium outlay.
Aggressive: Aggressive investors may buy and sell both out-of-the-money calls. Such a combination can generate higher returns potentially, but there's a lower probability the options will be in the money by expiration.
Moderate: Moderate investors may buy an in-the-money call and sell an out-of-the-money call, taking on some level of risk in exchange for potentially moderate returns.

② Implied volatility
A bull call spread can benefit from an increase in implied volatility. When implied volatility increases, the value of both the long call and the short call options in a bull call spread will increase. Given the increase in value of the long call option will be greater than that of the short call option due to its higher delta, the overall value of the bull call spread will increase as implied volatility increases, all other things being equal.

Risk Statement
The examples provided herein are for illustrative and educational purposes only and not intended to be reflective of results any investor can expect to achieve. The figures shown in the examples are not guarantees or projections, and no taxes or fees/expenses are included in the calculations which would reduce the figures shown. Actual results will vary.
Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. In the U.S., investment products and services on Moomoo are offered by Moomoo Financial Inc., Member FINRA/SIPC.
This article is for educational use only and is not a recommendation of any particular investment strategy. Content is general in nature, strictly for educational purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. All investing involves risks. Any examples are provided herein are for illustrative purposes only and not intended to be reflective of results any investor can expect to achieve.
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