Loading the player...

What is a 'Bull Call Spread'

Bull call spreads are an options strategy that involves purchasing call options at a specific strike price ,while also writing the same number of calls on the same asset and expiration date but at a higher strike price. A bull call spread is used when a moderate rise in the price of the underlying asset is expected.

Breaking Down 'Bull Call Spread'

Bull call spreads are a type of vertical spread. A bull call spread is also referred to as a long call vertical spread. Vertical spreads involve simultaneously purchasing and writing an equal number of options on the same underlying security, with the same expiration date. However, the strike prices are different. Purchasing the option is what produces the profit should the trade work out. The written option reduces the initial cost of the trade, but also caps the profit.

Bull Call Spread Mechanics

Since a bull call spread involves writing call options that have a higher strike price than that of the long call options, the trade typically requires a debit, or initial cash outlay. The maximum profit in this strategy is the difference between the strike prices of the bought option and the written option, less the net cost of options. The maximum loss is limited to the net premium paid for the options.

A bull call spread's profit increases as the underlying security's price increases up to the strike price of the written call option. If the underlying stock price increases beyond the strike price of the written option, the profit on the trade does not increase. Conversely, if the price falls below the strike price of the bought call option, losses are limited to the cost of the buying options.

Bull Call Spread Example

Assume a stock is trading at $30 and an investor has purchased one call option with a strike price of $32. The option expires in three months and costs $0.57 (or $57, since each contract is for 100 shares).

The investor also writes a call at $35. This option also expires in three months and they receive a $0.10 ($10) premium for writing the option.

The net cost of the trade is $47 9$57 - $10), plus trade commissions. This is the maximum loss for the trade, and is realized if the price of the underlying stock does move above $32.

If the price of the option does move above $32, the maximum profit occurs if the underlying stock moves to or above $35. This where the option was written, so any movement above $35 is forfeited. Therefore, the maximum gain is $35 - $32 = $3 x 100 shares = $300. The trade had a cost, though, so this cost must be deducted from the maximum profit: $300 - $47 = $253 less any commission costs.

As the strike prices show, the bull call spread spread is used when an investor is moderately bullish. It allows them to profit on a limited amount of upside in the underlying stock, because by writing the call (to reduce the net cost of the trade) they are giving up the opportunity to profit on any move above the written call strike price.

RELATED TERMS
  1. Bull Spread

    A bull spread is a bullish options strategy using either two ...
  2. Buy A Spread

    Buying a spread is an options strategy involving buying and selling ...
  3. Bull Put Spread

    A type of options strategy that is used when the investor expects ...
  4. Debit Spread

    A debit spread is an option strategy involving the simultaneous ...
  5. Spread Option

    A spread option is a derivative based on the value of the difference, ...
  6. Call Option

    A call option is an agreement that gives the option buyer the ...
Related Articles
  1. Trading

    Apple As An Example Of How to Use a Bull Call Spread to Trade

    Here's how you can use a bull call spread to trade stocks.
  2. Trading

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
  3. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  4. Trading

    Bear Put Spreads: An Alternative to Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  5. Trading

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing calls against shares you already own. Learn the pros and cons of this strategy.
RELATED FAQS
  1. When is a call option considered to be "in the money"?

    Learn about call options, their intrinsic values and why a call option is in the money when the underlying stock price is ... Read Answer >>
  2. How do I set a strike price for an option?

    Learn about the strike price of an option and how to set a strike price for call and put options depending on risk tolerance ... Read Answer >>
  3. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  4. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  5. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center