00:22 What is a Call Spread?

Call spread — Buying a call option with a strike that’s closer to being in the money while simultaneously selling another call option with a strike that’s further out-of-the-money.

An example is to buy the April 16 $81 strike calls for CHWY and then sell the April 16 $88 strike calls for CHWY. The spread or difference between the strikes was determined by the straddle looked at in the previous video.

Pros:

1. A cheaper strategy to place a single-directional bet on a stock when premiums are high. A call spread is less expensive because the premium collected from selling the second call options helps pay for the cost of the first call option.
2. If the stock price drops our loss is buffered by the call option sold.

Cons:

1. Needs a higher level of options trading and margin requirement to sell call options.
2. If the stock price gaps up quickly, some upside is lost due to the second call option being sold.

7:05 Risks to a call spread

The most that call spread can be worth is $7 ($88-$81). The most money I could make is $7- (cost of the trade = cost of buying the long call options - the premium received for selling the short option). In this case, it would have been $430 for 1 contract.

Break-even = Strike of long call + premium of long call - premium collected from the short call.

Max Loss = cost of buying the call option - premium received for selling a short option, or $270.

Actionable ideas

As options traders, we're paying less for the call spread and we also get better break evens. These benefits are traded for a capped or limited upside, and help us manage our risk.

Glossary