35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
Chapter 7: Bull Spreads 175
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DEGREES OF AGGRESSIVENESS
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AGGRESSIVE BULL SPREAD
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Depending on how the bull spread is constructed, it may be an extremely aggressive
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or more conservative position. The most commonly used bull spread is of the aggres
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sive type; the stock is generally well below the higher striking price when the spread
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is established. This aggressive bull spread generally has the ability to generate sub
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stantial percentage returns if the underlying stock should rise in price far enough by
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expiration. Aggressive bull spreads are most attractive when the underlying common
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stock is relatively close to the lower striking price at the time the spread is established.
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A bull spread established under these conditions will generally be a low-cost spread
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with substantial profit potential, even after commissions are included.
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EXTREMELY AGGRESSIVE BULL SPREAD
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An extremely aggressive type of bull spread is the "out-of-the-money" spread. In such
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a spread, both calls are out-of-the-money when the spread is established. These
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spreads are extremely inexpensive to establish and have large potential profits if the
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stock should climb to the higher striking price by expiration. However, they are usu
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ally quite deceptive in nature. The underlying stock has only a relatively remote
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chance of advancing such a great deal by expiration, and the spreader could realize a
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100% loss of his investment even if the underlying stock advances moderately, since
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both calls are out-of-the-money. This spread is akin to buying a deeply out-of-the
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money call as an outright speculation. It is not recommended that such a strategy be
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pursued with more than a very small percentage of one's speculative funds.
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LEAST AGGRESSIVE BULL SPREAD
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Another type of bull spread can be found occasionally - the "in-the-money" spread.
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In this situation, both calls are in-the-money. This is a much less aggressive position,
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since it offers a large probability of realizing the maximum profit potential, although
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that profit potential will be substantially smaller than the profit potentials offered by
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the more aggressive bull spreads.
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Example: XYZ is at 37 some time before expiration, and the October 30 call is at 7
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while the October 35 call is at 4. Both calls are in-the-money and the spread would
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cost 3 points (debit) to establish. The maximum profit potential is 2 points, but it
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would be realized as long as XYZ were above 35 at expiration. That is, XYZ could fall
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by 2 points and the spreader would still make his maximum profit. This is certainly a
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more conservative position than the aggressive spread described above. The com- |