The Bull Call Spread
A cheaper way to bet on a stock going up. By selling a higher strike call against your long call, you reduce your cost basis and define your risk.
What is a Bull Call Spread?
A Bull Call Spread (or Long Call Vertical) involves buying a call at a specific strike price while simultaneously selling another call at a higher strike price. Both calls have the same expiration date.
The goal is to profit from a moderate rise in the stock price. Because you receive premium for selling the higher strike call, the overall cost of the trade is lower than simply buying a call outright.
Is This Strategy Right for You?
Capital Requirements
Low. The cost is the net debit paid (premium of long call minus premium of short call).
Options Approval Level
Level 3. Requires spreads approval, as you are selling an option.
Best Suited For
- •Traders moderately bullish on a stock
- •Reducing the cost of a long call position
- •Limiting maximum potential loss
Pros and Risks
Advantages
- ✓Lower cost: Selling the call subsidizes the purchase of the long call.
- ✓Defined risk: You can never lose more than the net debit paid.
- ✓Lower breakeven: Because the cost is lower, the stock doesn't need to rise as much to be profitable.
Risks to Consider
- ⚠Capped profit: Your gains are limited if the stock skyrockets past your short strike.
- ⚠Assignment risk: If the short call is ITM at expiration, you may be assigned (though your long call covers it).
- ⚠Needs movement: The stock still needs to go up; time decay (theta) works against the long option more than the short one initially.
How It Works
Key Terms
Select Your Outlook
You expect the stock to rise to a certain price by expiration, but unlikely to go much higher.
Place the Trade
Buy an ITM or ATM call. Simultaneously sell an OTM call. Ensure both have the same expiration date.
Manage the Trade
Max profit is achieved if the stock is at or above the short strike at expiration. Max loss is limited to the initial cost.
Worked Example: XYZ at $50
Using a $50/$55 Bull Call Spread.
Bull Call Spread Payoff
Position Entry
Long Call
$50 Strike
Short Call
$55 Strike
Net Debit
$2.00
Max Risk
$200
Stock Rises to $60
Spread Value
$5.00 ($55-$50)
Cost
-$2.00
Net Profit
+$300 (Max Profit)
Stock Drops to $45
Spread Value
$0.00
Cost
-$2.00
Net Loss
-$200 (Max Loss)
Common Scenarios
Stock Rises Slowly
Perfect scenario. Your long call gains value, and time decay eats away at the short call you sold.
Closing Early
You often don't need to wait for expiration. If the stock hits your short strike, you've likely made most of your potential profit. Closing early locks it in.