Bull Spread

What is a bull spread?

A bull spread is an options strategy designed to profit from a moderate rise in the price of an underlying asset while limiting downside risk. It is a vertical spread: you buy one option and sell another option of the same type (both calls or both puts), with the same expiration but different strike prices. The lower-strike option is the long position and the higher-strike option is the short position.

Two common forms:
* Bull call spread — uses calls and is typically opened for a net debit.
* Bull put spread (credit put spread) — uses puts and is typically opened for a net credit.

Both approaches cap potential profit and loss, making them suitable for traders who expect a modest upward move rather than a large rally.

Bull call vs. bull put — practical differences

• Bull call spread: pay a net premium up front (debit). You profit if the underlying rises above the breakeven by expiration. Maximum loss is the net premium paid.
• Bull put spread: receive a net premium up front (credit). You profit if the underlying stays above the short put’s strike (options expire worthless). Maximum loss is capped by the strike difference minus the net credit.

Timing of cash flows differs (debit now vs. credit now), but both reduce initial cost compared with a naked long option and both limit risk.

Payoff mechanics and key formulas

General terms:
* K1 = lower strike (long option)
* K2 = higher strike (short option)
* Net premium = premium paid (call spread) or premium received (put spread)
* Strike difference = K2 − K1

Bull call spread (net debit):
* Maximum profit = (K2 − K1) − net debit
* Maximum loss = net debit
* Breakeven = K1 + net debit

Bull put spread (net credit):
* Maximum profit = net credit received
* Maximum loss = (K2 − K1) − net credit
* Breakeven = K2 − net credit

Both strategies realize maximum profit if the underlying closes at or above K2 at expiration, and realize maximum loss if it closes at or below K1.

Other practical notes:
* You can close the spread before expiration to lock gains or cut losses.
* For American-style options, short options carry assignment risk before expiration.

Example (bull call spread)

Assume the S&P 500 (SPX) is at 4,402.
* Buy one two‑month 4400 call for $33.75
* Sell one two‑month 4405 call for $30.50
* Net debit = $33.75 − $30.50 = $3.25 (×100 multiplier = $325)

Calculations:
* Breakeven = 4400 + $3.25 = 4403.25
* Maximum profit = (4405 − 4400) − $3.25 = $1.75 × 100 = $175
* Maximum loss = net debit = $325

So the trader profits up to a maximum of $175 if SPX is at or above 4405 at expiration, and could lose up to $325 if SPX is at or below 4400.

Pros and cons

Pros:
* Limits downside risk compared with a naked long option.
* Reduces cost of bullish exposure versus buying an outright call.
* Works well when you expect a modest, not extreme, rise in the underlying.

Cons:
* Caps upside profit — you forego large gains if the underlying makes a big move.
* Short leg can be assigned (for American options), creating early exercise risk.
* Still exposed to time decay and changes in implied volatility.

When to use a bull spread

Use a bull spread when:
* You expect a moderate increase in the underlying by expiration.
* You want to reduce the upfront cost of a long option or collect limited premium.
* You prefer defined, limited risk rather than unlimited upside potential.

Avoid when you expect a large, rapid rally (you’d miss larger gains) or when volatility and assignment risks make the short leg undesirable.

Key takeaways

• A bull spread is a limited-risk, limited-reward strategy for modestly bullish views.
• Bull call spreads are opened for a net debit; bull put spreads are opened for a net credit.
• Max profit and max loss are fixed and determined by strike spacing and net premium.
• They are useful when you want controlled exposure to a moderate upward move.