Bull Call Spread
Direction: Bullish

Strategy Description

Bull Call Spread is one of the vertical spread option trading strategies. It usually involves buying at the money call options and selling out of the money call options with the same expiration date. It is also known as Long Call Spread or Call Debit Spread

Bull Call Spread = Long Call (At a lower strike) + Short Call (At a higher strike)



Outlook
: With this stock option trading strategy, your outlook is moderately bullish.

You are expecting a mildly rise in the underlying stock price.


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Risk and Reward

Maximum Risk:

  • Limited to the amount of net premium paid for this Bullish Call Spread (May loss 100% of amount invested in this option trading strategy)

Maximum Reward :

  • Limited to the Different in Strike Price of the call options Less Net Premium Paid for the spread.

Breakeven :

  • Lower Strike Price of the call options Plus Net Premium Paid

Net Position:

  • This is a net debit spread as you buy a lower strike call (pay higher premium) and sell a higher strike call (collect lower premium) of the same expiration date.

Advantages and Disadvantages

Advantages:

  • Risk of downside is limited to the net premium paid. (Although still 100% loss on amount invested if the strike price, expiration date or underlying stock are badly chosen.)
  • Reduce the cost and breakeven of a bullish trade as compare to buying a call option outright.
  • Exit strategy is determined in advance when placing the spread.

Disadvantages:

  • Profit potential is limited to the Higher strike call sold if the underlying stock price rises.
  • Maximum profit arises only if the underlying stock rises to the higher of the 2 strike price selected.

Exiting the Trade

  • Simply offset the spread by buying back the call options that you sold and selling the call options that you have bought in the first place.
  • As the underlying stock fluctuate up and down, advance option traders may choose to unravel the spread leg by leg. In this way, the trader will leave one leg of the spread exposed while he profit from the closure of the other leg.

Bull Call Spread Example

Assumption: XYZ is trading at $72.65 a share on Mar 20X1. You are expecting share price of XYZ to rise mildly. The option premium for the At The Money call is relatively high for you. In this case, you may consider to buy one Jun 20X1 $70 strike call at $6.30 and sell one Jun 20X1 $75 strike call at $3.50 to lower the amount of premium payable and profit from the moderately bullish outlook of the stock. Note: commissions are NOT taken into account in the calculation.

Bull Call Spread Example
Bull Call Spread Options Strategies

Analysis of Bull Call Spread Example

Maximum Risk = Net Premium Paid = ($6.30 - $3.50) * 100 = $280
Maximum Reward = Difference in Strike Price Less Net Premium Paid = ($75 - $70) * 100 - $280 = $220.
Breakeven = Lower Strike Price of the call options Plus Net Premium Paid = $70 + $2.80 = $72.80

This is one of the most common and basic forms of stock option strategies. When you entered into this spread, you are moderately bullish on the underlying stock and are looking for a way to profit from a bullish move at a reasonable cost. This is because if a trader is very bullish, he would have bought a call option outright and gain a potentially unlimited profit.

The net effect of using this option spread strategy is to lower the cost and breakeven of the trade compare to buying a call option outright. The bought leg of the spread gives you the leverage. The short leg of the spread reduces your cost and increase the leverage, though at the expense of capping the maximum profit.

Try to ensure that the underlying stock is in an upward trend and trade within a limited range of stock prices when you are using this strategy.

Identify a clear area of support.

It is preferably to trade this option trading strategy with at least 3 months to expiration so as to give yourself more time to be right. Use the same expiration date for both legs of the calls.


There are literally thousands of Bull Call Spread options combinations available. Each has its own unique risk, reward, time frames, volatilities characteristics and probabilities of success. You should pick the strike price and time frame of the spread according to your risk profile and forecast. Selecting the option trading strategies with appropriate risk-reward parameters is important to your long term success in trading spread.

Bull Put Spread Bear Put Spread Long Call Condor
Bull Put Spread
  • Bullish Strategy
  • Limited Risk
  • Limited Profit
  • Credit Trade
  • Same risk profile as Bull Call Spread
  • Short Put + Long Put
Bear Put Spread
  • Bearish Strategy
  • Limited Risk
  • Limited Profit
  • Debit Trade
  • Opposite risk profile of Bull Call Spread
  • Long Put + Short Put
Long Call Condor
  • Sideway Strategy
  • Limited Risk
  • Limited Profit
  • Debit Trade
  • Bull Call Spread + Bear Call Spread


Next go to another bullish strategy, Bull Put Spread, to learn how income can be earned in a bullish market.

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