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Buy Call Spread
Buying a call spread consists of simultaneously buying a lower strike price call (A) and selling a higher strike price call (B). It will always be a debit spread (meaning you must pay a premium). When to use: Buying call spreads functions differently than buying calls. If a producer books their crop and purchases a call spread they can participate in a rally up to the strike price of the call option they sold. In the above graph, it would be option B. However, this limited upside is offset by the lower premium paid for a call spread. Under the right circumstances call spreads can be extremely effective. Crop Risk usually recommends them to offset the extremely high premiums that can sometimes accompany outright calls or puts in times of high market volatility.Profit Characteristics: Option gains limited, reaching maximum if market ends at or above B (call you sold) at expiration. Breakeven is A (call you purchased) + net cost of spread.Loss Characteristics: What is gained by limiting option gain potential is mainly a limit to loss if the market does not move higher. Maximum loss is at or below A (call you bought), which would equal net cost of spread. |
Futures and options trading contains the risk of loss and is not suitable
for all investors.
Please carefully consider your financial condition prior to investing.
Please carefully consider your financial condition prior to investing.