9. Bull Spread

Scenario:

The trader feels bullish on Lumber, but volatility is in question. He could try futures as an alternative, but wants the comfort of a limited loss position. He decides on a bull spread with the higher strike written at the top of his expected trading range of 210.

Specifics:
Underlying Futures Contract:	November Lumber
Futures Price Level:	193.00
Days to Futures Expiration:	60
Days to Options Expiration:	40
Option Implied Volatility:	18.6%
Option Position:	Long 1 Nov 200 Call	- 2.10 ($315)
	Short 1 Nov 210 Call	+ 0.50 ($ 75)
		- 1.60 ($240)

At Expiration:
Breakeven:	201.60 (200.00 strike + 1.60 debit)
Loss Risk:	Limited to premium paid. Losses increase below 201.60 to a maximum loss below 200.00 of 1.60 ($240).
Potential Gain:	Limited to difference between strikes less debit paid (10.00 - 1.60) 8.40 ($12,600). Gains mount above 201.60 with maximum profit at 210.00.

Things to Watch:

Volatility changes affect this spread very little. Therefore, if the trader has an opinion on volatility, one of the other strategies may work better. Check the next page for follow-up strategies.

Follow-up Trading Strategies