I have been trading for a bit but usually stick to simple trades. I keep hearing about call spreads and I don’t really get what they are.
Is it just buying and selling calls together? It seems more complex than regular trades, but I could be missing something.
I want to grasp the basics before diving into new strategies.
Call spreads create a cushion for your trades as they limit both potential gains and losses to a defined range.
For example, purchasing a call at $50 and selling another at $55 sets your maximum profit at $5 minus your initial investment. In the worst-case scenario, you only lose what you paid to enter the trade.
This strategy is smart since selling the call helps offset part of the cost, making it more affordable than simply buying calls.
Two years back I kept bleeding money on straight calls - pure greed chasing unlimited upside.
Switched to call spreads and it was a game changer. Yeah, you cap your gains but the cheaper entry means you don’t get destroyed when trades go south.
My Tesla spread last month hit 65% in three days instead of me potentially losing my shirt.
Call spreads are really straightforward. You buy a call option with a lower strike price and sell another call at a higher strike price, both with the same expiration. This approach lowers your initial costs because you receive premium from the sold call, which helps offset the cost of the bought call. Your maximum profit is the difference in strike prices minus your total cost. This strategy is ideal if you are not anticipating big market moves, as it limits both your losses and gains.
Bull call spread breakdown:
• Buy an ITM/ATM call
• Sell an OTM call at a higher strike
• Both expire on the same date
• Max profit = difference between strikes minus what you paid
• Max loss = whatever you paid upfront
Costs way less than buying calls outright.
Call spreads destroyed me when I first jumped in without knowing what I was doing.
Basically, you buy a call and sell another at a higher strike - same expiration. Your profit gets capped but so does your risk.
Learned this after blowing $800 on naked calls. If I’d used spreads on that disaster Apple trade, I would’ve saved serious money.
Made $340 profit on SPY spreads last week with just $180 risk.