What is a 'Bull Spread'

A bull spread is a bullish, vertical spread options strategy designed to profit from a moderate rise in the price of the underlying security. It's comprised of the simultaneous purchase and sale of either call options or put options with different strike prices but with the same underlying asset and expiration date. Regardless of options type, the lower strike price is bought and the higher strike price is sold.

If the strategy uses call options, it is called a bull call spread. If it uses put options, it is called a bull put spread.

BREAKING DOWN 'Bull Spread'

A bull call spread is also called a debit call spread because the trade generates a net debit to the account when it is opened. The option purchased costs more than the option sold.

A bull put spread is also called a credit put spread because the trade generates a net credit to the account when it is opened. The option purchased costs less than the option sold.

The practical difference between the two is the timing of the cash flows. For the bull call spread, you pay upfront and seek profit later when it expires. For the bull put spread, you collect money up front and seek to hold on to as much of it as possible when it expires.

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 the options - the debit. The maximum loss is only limited to the net premium (debit) 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 beyond 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 Put Spread Mechanics

Since a bull put spread involves writing put options that have a higher strike price than that of the long call options, the trade typically generates a credit at the start. The maximum profit using this strategy is equal to the amount received as a credit. The maximum loss a trader can incur when using this strategy is equal to the difference between the strike prices minus the net credit received.

Both strategies achieve maximum profit if the underlying asset closes at or above the higher strike price.

Both strategies result in maximum loss if the underlying asset closes at or below the lower strike price.

Breakeven, before commissions, in a bull call spread occurs at (lower strike price + net premium paid).

Breakeven, before commissions, in a bull put spread occurs at (upper strike price - net premium received).

RELATED TERMS
  1. Bull Put Spread

    A bull put spread is an income-generating options strategy that ...
  2. Vertical Spread

    A vertical spread strategy uses purchases and sales of the same ...
  3. Spread Option

    A spread option is a derivative based on the value of the difference, ...
  4. Strike Price

    Strike price is the price at which the underlying asset of a ...
  5. Box Spread

    A box spread is a complex options strategy designed to profit ...
  6. Butterfly Spread

    Butterfly spreads are a neutral option strategy, used to profit ...
Related Articles
  1. Trading

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  2. Trading

    What is a Bear Call Spread?

    A bear call spread is an option strategy that involves the sale of a call option and simultaneous purchase of a call option on the same underlying asset.
  3. 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.
  4. Trading

    Bear Put Spreads: An Alternative to Short Selling

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

    Tips for Answering Series 7 Options Questions

    We'll show you how to ace the largest and most difficult section of the Series 7.
  6. Trading

    What is a Bear Put Spread?

    A bear put spread entails the purchase of a put option and the simultaneous sale of another put with the same expiration but a lower strike price.
  7. Trading

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  8. Trading

    How To Buy Options On the Dow Jones

    These four Dow Jones option buying strategies offer profitable alternatives to trading the exchange-traded fund directly.
  9. Trading

    4 Popular Options Strategies for 2016

    Learn how long straddles, long strangles and vertical debit spreads can help you profit from the volatility that stock analysts expect for 2016.
RELATED FAQS
  1. How do traders combine a short put with other positions to hedge?

    Learn how sold puts can be utilized in different types of hedging strategies, and understand some of the more common option ... 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. 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 >>
  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. Can an Option Have a Negative Strike Price?

    When it comes to exchange traded options, an option can't have a negative strike price. Read Answer >>
Trading Center