7 Minute Read

Options Theory: Hedging Bull Call Spreads

April 7, 2022

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Today’s video walks through my preferred stop loss and hedging methods for bull call spreads.

Notes: Bull Call Spread Management

It is an Aggressive/directional trade

Trade Management

  1. Risk is what you paid, you don’t need a stop loss.
  2. Exit if stock breaks a key support zone.
  3. Hedge/Adjust the trade to lose less or increase my chance or recouping losses?
    1. You could add an OTM bear call spread when the stock breaks support as a short-term bearish hedge.
  4. Adding 2nd bull call at lower price.

Example

  • Stock $100
  • Buy May 100/105 bull call spread for $2.
  • Stock breaks $98 support zone.
  • Hedge: Sell May 105/110 bear call spread for $1 credit. Turn the trade into a call fly (100/105/110 call fly)
  • Hedge: Sell May 110/115 bear call spread for 50 cents credit. Turn the trade into a call condor (100/105/110/115)
  1. Advantage of adding bear call is it reduces the cost/risk of the trade.
    1. Would I do anything more aggressive than add a bear call? Not usually.
  2. Enter a 2nd bull call spread at a lower price (scaling in).
    1. Buy a 2nd May 100/105 bull call spread for $1. Average cost drops from $2 to $1.50.
  3. Buy a bear put spread/long put

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