Break-Even = Lower Strike Price + Net Premium Paid
= 2060 + (50-25)
=2085
Pay-off Structure of Bull Call Spread :
Possible NIFTY Index
Premium Paid on Long Call
Profit/Loss on Long Call (A)
Profit/Loss on Short Call (B)
Profit/Loss of Call Index Option
Remarks
2060
25
-50
25
-25
Out-The-Money
2070
25
-50
25
-15
Out-The-Money
2080
25
-40
25
-5
Out-The-Money
2090
25
-30
25
5
Out-The-Money
2100
25
-20
25
15
In-The-Money
2110
25
-10
25
25
In-The-Money
2120
25
0
15
25
In-The-Money
2130
25
10
5
25
In-The-Money
2140
25
20
-5
25
In-The-Money
2150
25
30
-15
25
In-The-Money
Pay-off Graph of Short PUT:
Interpretation:
An investor with a bullish market outlook should buy a call spread. The "Bull Call Spread" allows the investor to participate to a limited extent in a bull market, while at the same time limiting risk exposure.
To "buy a call spread" is to purchase a call with a lower exercise price and to write a call with a higher exercise price. The trader pays a net premium for the position. Here the investor taking the Long position on a NIFTY Call Index option with the Strike price of 2060, and taking the Short Position on a NIFTY Call Index option with the higher strike price of 2100.
The cost of Putting on this position will be the difference between the premium paid for the low strike call and the premium received for the high strike call. The investor is simultaneous Paying the Premium and Receiving the Premium. He pay net premium because he has to pay higher for the lower exercise price. So he is paying Rs. 50 for the Lower Strike Price of 2060 and Receiving the Premium of Rs. 25 for the Higher Strike Price of 2100. He is pay the net premium of Rs. 25 for taking the both position.
The investor's potential loss is limited. Even if the market takes a drastic decline in price levels, the holder of a call is under no obligation to exercise the option. He may let the option expire worthless. So, here the investor has the limited loss of Rs. 30. That is the premium paid for taking the position.
The investor's profit potential is limited. When both calls are in-the-money, both will be exercised and the maximum profit will be realized. The Maximum Profit he can generate is (Higher strike price – Lower strike price) – Net premium paid. (2100 - 2060) – 25 = Rs. 15.
The investor’s potential loss is limited. At the most, the investor can lose is the net premium. The net premium paid is (50 - 25) = Rs. 25.
The investor breaks even when the market price equals the lower exercise price plus the net premium. Here the Break-Even is 2060 + 25 = 2085.
