An in-depth guide to the bull call spread options trading strategy, designed to benefit from a moderate rise in stock prices while limiting risk.
A bull call spread, also known as a long call spread or call debit spread, is an options trading strategy that involves the simultaneous purchase and sale of call options with the same expiration date but different strike prices. This strategy is used to profit from a moderate increase in the price of the underlying asset while limiting potential losses.
A vertical bull call spread is the most common type and involves buying a call option and selling another call option at a higher strike price. Both options have the same expiration date.
where \( K1 < K2 \).
A diagonal bull call spread involves buying a long-term call option and selling a short-term call option at a higher strike price.
where \( T1 > T2 \) and \( K1 < K2 \).
Maximum Loss: The maximum loss occurs when the underlying asset’s price at expiration is at or below the strike price of the long call option. This loss is limited to the net premium paid.
Maximum Profit: The maximum profit is achieved when the price of the underlying asset at expiration is at or above the strike price of the short call option. This profit is limited to the difference between the strike prices minus the net premium paid.
Suppose you believe that the stock of Company XYZ, currently trading at $100, will rise moderately over the next month. You can initiate a bull call spread by:
Buying a call option with a strike price of $100 for $5 (Premium).
Selling a call option with a strike price of $110 for $2 (Premium).
Net Premium Paid: $5 - $2 = $3.
Maximum Loss: $3 per share.
Maximum Profit: ($110 - $100) - $3 = $7 per share.