Bull Spread Strategy: Understanding Risks & Potential Rewards

The bull spread is a type of option strategy that is commonly used in order to maximize the movement in an underlying security. This strategy is accomplished by purchasing the lowest strike price and selling at the highest strike price that is available. The options are purchased with the same expiration date. This creates a wide area between the lowest and highest strike prices that are available.

Benefit

The biggest benefit of using the bull spread is that you will be able to maximize your returns. When the price of the security increases, the returns will be large. Even though this strategy can provide you with a great return on investment, you are also going to be taking on a large amount of risk.

Risks

You have to make sure that the underlying asset moves to the highest point of your strike price in order to benefit. If you do not properly time the investment, or choose the wrong security to invest in, you could potentially lose your entire investment. The loss moves very quickly.

This is known as a very high risk, high reward investment strategy.  This type of investment tool should be used by those with experience.