Bull Call Spread

A bull call spread, also called a long call spread or call debit spread, buys a call at one strike and sells a call at a higher strike with the same expiration. The sold call reduces the cost of the bought call, but it also caps the profit. The result is a bullish position with a defined maximum loss, a defined maximum gain and a lower break even than a single call. It suits traders who expect a moderate rise to a target, rather than an explosive move.

Construction#

1. Buy a call at a lower strike (often at or near the money).
2. Sell a call at a higher strike (near your price target).
3. Same underlying, same expiration.
4. Pay a net debit.

Payoff at a glance#

The payoff shape is drawn in Option Payoff Diagrams.

Worked example#

Why choose a bull call spread#

• Lower cost than buying a call alone.
• Lower break even, since the debit is smaller.
• Less exposure to implied volatility: the short call offsets much of the long call's vega, which helps around events like earnings. See Vega.
• Less time decay than a single call, because the short call's decay offsets part of the long call's.

The trade off is capped profit above the higher strike.

Choosing strikes#

A useful guide: set the short strike at a level the stock can realistically reach by expiry, such as a resistance level or a measured move target. See Support and Resistance and Profit Targets.

Choosing expiration#

Allow enough time for your move. Spreads reach close to maximum value only near expiration, unless the stock moves far past the short strike. If you expect a move within a month, an expiry of six to eight weeks gives room. See Option Expiration Dates.

Managing the trade#

• Take profits at 50% to 80% of maximum gain; the last part takes longest to earn.
• Cut losses if the thesis breaks, for example if price breaks a key support.
• Close before expiry if price is between the strikes, to avoid assignment complications.
• Roll up if the stock rises quickly and you remain bullish: close the spread and open one at higher strikes.

Assignment risk#

If the short call is in the money, it can be assigned early, especially before an ex dividend date. You would become short shares, still protected by your long call. Closing the spread or exercising the long call resolves it. See Exercise and Assignment.

Common mistakes#

• Setting the short strike too close, capping profit at a level easily exceeded.
• Buying too little time.
• Holding to expiry for the last few cents.
• Ignoring the combined bid ask spread of two legs; use a single limit order for the spread.

Frequently asked questions#

What is a bull call spread?#

Buying a call and selling a higher strike call with the same expiry, creating a bullish trade with limited risk and limited profit.

What is the maximum profit on a bull call spread?#

The difference between the strikes minus the net debit paid, reached when the underlying is at or above the higher strike at expiry.

Is a bull call spread better than buying a call?#

It is cheaper and has a lower break even, but caps profit. It suits moderate moves; a single call suits large moves.

Next, learn the bearish mirror image in Bear Put Spread.