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:
- Buying of a European Call Option with a specific strike price K1
- 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
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# 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 = St-K1; elif (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 = St-K1; print("x"); elif (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:
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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 - |