The Bull Call Spread Strategy

The strategy used for our model is the bull call spread strategy. In this strategy, an
investor will buy call options at a specific strike price and sell the same number of calls
at a higher strike price. Both call options have the same expiration month and
underlying asset.
The bull call spread strategy has been used as we hold a bullish view on the Nifty
Index and expect a moderate rise in the price. We have adopted the following strategy:
1. Buy two call at 7550
2. Sell two calls at 7800
The open interest is very high at the level of 7800 for call options and at the level of
7550 for put options. Therefore, we think the higher level of 7800 will serve as a strong
resistance level and the lower level of 7550 will be a good support level.
The binomial pricing model suggests a 6 day range of 7616 7981 which is a ~180
points range from the current Nifty price of 7797. Hence, we expect the market to move
between this smaller range.
Given the assumption, the two calls bought at 7550 provide an unlimited upside
potential while the two calls sold at a higher strike price of 7800 provide us a cushion in
terms of the premium received from the calls that we short to cover the premiums we
would be required to pay for the calls we go long on.
The strategy gives us a return on investment in the range of 0-39% given we expect the
price of the underlying to move in the range 7550 to 7800 over the 20 day period from
10
th
July to 30
th
July 2014.
The implied volatility for at-the-money call options calculated over a three day period
ranges between 1212.5%. Hence, the annualized standard deviation for the binomial
pricing model is taken as 12.5%.




Submitted by:
Kriti Goyal
Aniket Pathak