What is a 'Bull Call Spread'
A bull call spread is an options strategy that involves purchasing call options at a specific strike price while also selling the same number of calls of the same asset and expiration date but at a higher strike. 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 may be 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, same options class and same expiration date. However, the strike prices are different. There are two types of vertical spreads, bull vertical spreads and bear vertical spreads, which could both be implemented using call and put options.
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 long and short options less the net cost of options. The maximum loss is only 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 short call option. Thereafter, the profit remains stagnant if the underlying security's price increases past the short call's strike price. Conversely, the position would have losses as the underlying security's price falls, but the losses remain stagnant if the underlying security's price falls below the long call option's strike price.
Bull Call Spread Example
Assume a stock is trading at $18 and an investor has purchased one call option with a strike price of $20 and sold one call option with a strike price of $25 for a total price of $250. Since the investor wrote a call option with a strike price of $25, if the price of the stock jumps up to $35, the investor is obligated to provide 100 shares to the buyer of the short call at $25. This is where the purchased call option allows the trader to buy the shares at $20 and sell them for $25, rather than buying the shares at the market price of $35 and selling them for a loss. The maximum gain is equivalent to $250, or ($25 - $20) * 100 - $250, less any trading costs.
-
Buy A Spread
Option strategy that will be profitable if the underlying security ... -
Long Leg
The part of an option spread strategy that involves buying an ... -
Horizontal Spread
An options strategy involving the simultaneous purchase and sale ... -
Short Leg
Any contract in an option spread in which an individual holds ... -
Bear Put Spread
A bear put spread is a bearish options strategy used to profit ... -
Strike Price
The price at which a specific derivative contract can be exercised. ...
-
Trading
Vertical Bull and Bear Credit Spreads
This trading strategy is an excellent limited-risk strategy that can be widely used. -
Trading
What is a Bear Call Spread?
A bear call spread is an option strategy that involves the sale of a call option, and the simultaneous purchase of a call option (on the same underlying asset) with the same expiration date but ... -
Trading
Three Ways to Profit Using Call Options
A brief overview of how to provide from using call options in your portfolio. -
Trading
Profiting From Stock Declines: Bear Put Spread Vs. Long Put
If you're bearish, you should compare the risk/reward characteristics of these two strategies. -
Trading
Options Strategies for Your Portfolio to Make Money Regularly
Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums. -
Trading
Using Options To Pay Off Debt
We tell you about four option strategies that could provide a way to pay off your debt.
-
How do I set a strike price in an options spread?
Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads ... Read Answer >> -
When does one sell a put option, and when does one sell a call option?
An investor would sell a put option if her outlook on the underlying was bullish, and would sell a call option if her outlook ... Read Answer >> -
What option strategies can I use to earn additional income when investing in the ...
Learn about a couple of good options strategies that traders can use to enhance investing profitability when investing in ... Read Answer >> -
How Do Speculators Profit From Options?
Options are a risky game, but you can learn speculators' tricks to use them to your advantage. Read Answer >>