Modelling Of A Bull Spread Using Python

Overview:

• A bull spread is an option strategy employed by the investors when they think that the market is going to behave bullish in the near term.
• A bull spread involves the following actions:
1. Buying of a European Call Option with a specific strike price K1
2. Selling of a European Call Option with a strike price higher than K1
• When the stock price moves above K1 and beyond K2 the investor makes limited profit.
• When the stock price is below K1 the investor makes zero profit. There will not be any loss as well.

Example: Modeling of a Bull Spread using Python

 # Python example St          = 4500; #Initial stock price K1          = 4600; #Buying out of money call K2          = 4700; #Selling out of money call   print("K1:%2.f"%K1); print("K2:%2.f"%K2);   # Stock price goes upwards i = 0 while i < 5:     St = St + 50     payoff = 0     if (St>K1 and St= K2):         payoff      = K2-K1;     elif (St <= K1):         payoff  = 0;     else:         payoff  = 0;                     print("Stock price:%2.2f"%St);     print("Payoff from bull spread:%2.2f"%payoff);     print("-")         i = i + 1;   # Stock price goes downwards St          = 4500; #Initial stock price    i = 0 while i < 5:     St = St - 50     payoff = 0     if(St>K1 and St= K2):         payoff      = K2-K1;         print("y");     elif (St <= K1):         payoff  = 0;     else:         payoff  = 0;       print("Stock price:%2.2f"%St);     print("Payoff from bull spread:%2.2f"%payoff);     print("-")     i = i + 1;

Output:

 K1:4600 K2:4700 Stock price:4550.00 Payoff from bull spread:0.00 - Stock price:4600.00 Payoff from bull spread:0.00 - Stock price:4650.00 Payoff from bull spread:50.00 - Stock price:4700.00 Payoff from bull spread:100.00 - Stock price:4750.00 Payoff from bull spread:100.00 - Stock price:4450.00 Payoff from bull spread:0.00 - Stock price:4400.00 Payoff from bull spread:0.00 - Stock price:4350.00 Payoff from bull spread:0.00 - Stock price:4300.00 Payoff from bull spread:0.00 - Stock price:4250.00 Payoff from bull spread:0.00 -