Bull Call Spread

Bull Call Spread

What it is

A bull call spread (also called a debit call spread) is a moderately bullish options strategy that uses two call options on the same underlying asset with the same expiration date:
* Buy a call at a lower strike (long call).
* Sell a call at a higher strike (short call).

The spread reduces the net cost of going long a call by collecting premium on the short call. It limits both potential upside and downside: maximum loss is the net premium paid; maximum gain is the difference between strikes minus that premium.

When to use it

Use a bull call spread when you expect the underlying to rise moderately by expiration, not to make a large rally. It costs less than a single long call but caps upside beyond the short strike.

How to construct a spread

1. Choose an underlying asset and an outlook (moderately bullish).
2. Select an expiration.
3. Buy a call at strike K1 (lower strike).
4. Sell a call at strike K2 (higher strike), same expiration.
5. Net premium = premium paid for long call − premium received for short call.

Both options should have the same expiration. Contracts represent standardized share quantities (e.g., 100 shares per contract in U.S. equity options).

Key calculations

Formulas (per share)
* Net premium = premium_long − premium_short
* Maximum loss = Net premium (× number of shares per contract)
* Maximum gain = (K2 − K1) − Net premium (× number of shares)
* Breakeven price = K1 + Net premium

Example
* Underlying at $50
* Buy 1 × $50 call for $3 (long)
* Sell 1 × $55 call for $2 (short)
* Net premium = $1 per share
* Breakeven = $50 + $1 = $51
* Max loss = $1 × 100 = $100
* Max gain = ($55 − $50 − $1) × 100 = $400

(Does not include commissions, fees, or taxes.)

Pros and cons

Pros
* Cheaper than buying a single long call (lower upfront cost).
* Limits downside to the net premium paid.
* Suitable for modest bullish scenarios.

Cons
* Upside is capped at the short strike.
* Net gain is reduced by the premium paid.
* Transaction costs and bid-ask spreads can meaningfully affect small trades.

Sensitivity to volatility and time

Volatility (vega)
* Vega is near zero relative to single-option positions because long and short calls move together with volatility changes. Rising volatility increases both option prices, partly offsetting each other.
* Not immune—vega impact depends on moneyness and time to expiration.

Time decay (theta)
* Time decay affects the long and short calls differently.
* The long call loses value as expiration approaches (detrimental).
* The short call also loses value over time (beneficial).
* If the underlying is roughly midway between strikes, net theta can be small because both options decay at similar rates.
* If the underlying is near the long strike, time decay typically hurts the spread; if near the short strike, time decay can help.

Effect of underlying price moves

• If price ≥ short strike at expiration: strategy achieves maximum gain.
• If price is between strikes at expiration: partial profit, depending on proximity to strikes.
• If price ≤ long strike at expiration: both options expire worthless and loss = net premium.

Other considerations

• Early assignment: For American-style options, a short call can be assigned before expiration (especially if deep in the money or before a dividend). Be prepared for assignment risk.
• Dividends: Expected dividends increase assignment risk for short calls.
• Transaction costs: Can erode returns, especially for small positions.
• Strike spread and expiration: Wider strike distance increases potential profit but usually increases initial cost. Longer expirations give more time for the move but raise option premiums.
• Position sizing and risk tolerance: The strategy limits loss to the initial cost; size positions accordingly.

Bull call spread vs. bull put spread

• Bull call spread: debit strategy (pay net premium), profits from a moderate rise.
• Bull put spread: credit strategy (receive net premium), profits if price stays above the short put strike.
  Both are moderately bullish but differ in margin, payoff profile, and when they are appropriate.

When to exit

• Close early to lock in profits or limit losses (sell the long call and buy back the short call).
• Many traders avoid last-minute expiration risks and assignment by closing or rolling positions before the final days (commonly several weeks before expiration), but timing should match your outlook and liquidity.

Bottom line

A bull call spread is a cost-efficient way to express a moderate bullish view while capping downside to the premium paid. It trades off unlimited upside for a lower upfront cost and reduced risk. Consider volatility, time to expiration, assignment risk, dividends, and transaction costs when selecting strikes and expiration.