Bull Call Spread versus Naked Call: Payoff, Margin and Early Exit
On 1 April the Nifty is at 24,000 and the 30 April options are quoting: 24,200 call at ₹120 and 24,600 call at ₹45. Kavya has a moderately bullish view with a target of 24,600 by expiry and a hard stop at 23,900. She can either buy one 24,200 call outright or put on a bull call spread by buying the 24,200 call and selling the 24,600 call. The lot size is 25. She has ₹1.2 lakh of capital, and her broker charges ₹20 per contract per leg plus statutory charges; STT on option sale is 0.0625% of premium, and on exercise 0.125% of settlement value. The SPAN+exposure margin on a naked short 24,600 call would be about ₹1.5 lakh, while the spread attracts a much smaller margin because the long leg offsets the short.
1. Compute the debit, maximum profit, maximum loss and breakeven for both positions, and the profit at expiry if the Nifty settles at 24,600 and at 25,000.
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Bull call spread (buy 24,200 CE at 120, sell 24,600 CE at 45): net debit = 75 × 25 = ₹1,875. Maximum profit = (400 − 75) × 25 = ₹8,125. Maximum loss = ₹1,875. Breakeven = 24,200 + 75 = 24,275.
Naked long 24,200 call at 120: cost = ₹3,000. Breakeven = 24,320. Maximum loss = ₹3,000; profit unlimited above.
At 24,600: spread = (400 − 75) × 25 = ₹8,125; naked = (400 − 120) × 25 = ₹7,000.
At 25,000: spread stays at ₹8,125 (short call caps it); naked = (800 − 120) × 25 = ₹17,000.
The naked call overtakes the spread once (S − 24,200 − 120) × 25 > 8,125, i.e. above 24,645.
2. Which position better fits her stated view and capital, and what practical constraints decide the choice?
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Her view is capped at 24,600, so the spread captures almost all of it: at the target it pays ₹8,125 against ₹7,000 for the naked call, and it risks ₹1,875 instead of ₹3,000. The spread's breakeven is also lower (24,275 vs 24,320).
Margin is decisive. One naked short call needs about ₹1.5 lakh of SPAN+exposure margin, more than her ₹1.2 lakh capital - the position is not fundable as described. The spread's short leg is covered by the long 24,200 call, so the margin is a fraction of that and the risk is defined at ₹1,875 no matter how far the Nifty falls.
The trade-off is upside: above 24,645 the naked call earns more, but that is outside her stated target and outside her capital. A trader who genuinely expects a runaway rally should use a different structure (for example a ratio or a call with a higher strike) rather than a naked short-margin position she cannot carry.
3. After 10 days the Nifty is at 24,450 and the spread is quoted at ₹205. Evaluate closing versus holding, using remaining reward and risk.
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Closing now realises (205 − 75) × 25 = ₹3,250 on a ₹1,875 debit.
If held to expiry, the maximum additional gain is (400 − 205) × 25 = ₹4,875, achievable only if the Nifty finishes at or above 24,600. The downside is giving back the entire current ₹205 of value, i.e. ₹5,125, if the Nifty falls below 24,200 - although her stated stop at 23,900 would trigger earlier.
So the remaining reward-to-risk is roughly 1:1.05, far worse than the original 4.3:1. The net delta is positive but modest, and with 20 days left the short 24,600 call still carries time value that decays in her favour only if the Nifty stays below 24,600. Judgement: if she still expects 24,600 within days, holding is defensible; if the view has softened or she needs the capital, closing locks a 173% gain on the debit and removes the risk of a reversal. Costs are trivial here - STT on the sale of the short leg at 0.0625% of premium is well under ₹1.