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## 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.

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## 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.

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