What is a Bull Call Spread?
A bull call spread is an options strategy used when a trader is betting that a stock will have a limited increase in its price. The spread involves buying call options at a specific strike price and expiration date and selling an equal number of calls at a higher strike price for the same expiration date. A bull call spread is a type of vertical spread.
How To Manage A Bull Call Spread
How Does a Bull Call Spread Work?
To construct a bull call spread, a trader buys a call option for a specific expiration date and pays a premium. At the same time, the trader sells a call option at a higher strike price and same expiration date, collecting a premium. The reason this is done is to reduce the expense of buying the lower strike price call. In this type of transaction, the losses and gains are limited, reducing the risk involved. The trader can only lose the net cost to create the spread.
A Real World Example
An options trader buys 1 XYZ June 21 call at the $50 strike price and pays $2.00 per contract when XYZ Inc. is trading at $49. At the same time, the trader sells 1 XYZ June 21 call at the $60 strike price and receives $1.00 per contract. Because the trader paid $2.00 and received $1.00, the trader’s cost to create the spread is just $1.00 per contract, or $100. If the stock falls below $50, both options will expire worthless, and the trader would lose only their initial cost of $1.00 per contract. Should the stock rise to $61, the value of the $50 call would rise to $10, and the value of the $60 call would remain at $1. However, any further gains in the $50 call are forfeited and the trader’s total profit would be $9 on the trade. If the stock were to fall to $30, the maximum loss would be only $1.00. If the stock soared to $100, the maximum gain would still be $9.