Bull Call Spread

What is a Bull Call Spread? How do you buy call options on a discount with a bull call spread?

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Bull Call Spread - Definition

A bullish options strategy which aims to reduce the upfront cost of buying call options for profiting from stocks that are expected to rise moderately.

Bull Call Spread - Introduction

So, you wish to profit when a stock moves upwards but you want to buy its call options at a discount?

Enters Bull Call Spread!

A Bull Call Spread is a bullish option strategy that profits if the price of the underlying asset rises moderately. Some people call it the Vertical Call Spread but I like to use Bull Call Spread instead because vertical call spread could also refer to a Bear Call Spread.

The Bull Call Spread's main advantage is that it is cheaper than buying call options on its own. In fact, it is better known as an options trading strategy that lets you buy call options at a discount.

The main drawback of the Bull Call Spread is that it has a limited profit potential. This means that there is a limit to the maximum possible profit that can be made by the Bull Call Spread. In spite of that, the Bull Call Spread remains one of the most commonly used options trading strategy of all time.

This Bull Call Spread tutorial shall cover the bull call spread's logic, when to use, how to use and different variants of the Bull Call Spread.

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Bull Call Spread - Classification

Strategy : Bullish | Outlook : Moderately Bullish | Spread : Vertical Spread | Debit or Credit : Debit

Bull Call Spread - Buying Call Options At A Discount

Time decay of Extrinsic Value is the number one enemy of options traders buying call options. Having the value of those call options decrease each day the underlying stock fails to rise is certainly a painful ordeal. The Bull Call Spread helps to reduce the effects of time decay of those call options by Selling to Open (shorting) out of the money call options in order to partially offset the price of these call options. This reduces the effect of time decay on the position and also increases return on investment since part of the price of the call options have been offset by the sale of the out of the money call options. This effectively allows you to buy call options at a discount and is what makes the Bull Call Spread so popular in options trading. Another beauty of the Bull Call Spread is that because it is cheaper than just buying call options, the resultant return on investment would also be higher when the underlying stock closes at the strike price of the short call options.

When To Use Bull Call Spread?

One would use a bull call spread when one is confident in a moderate rise in the price of the underlying stock up to the strike price of the short call option.

How To Use Bull Call Spread?

Establishing a Bull Call Spread involves the purchase of an At The Money or In The Money call option on the underlying asset while simultaneously writing (sell to open) an Out of the Money call option on the same underlying asset with the same expiration month .

Buy ATM Call + Sell OTM Call

Bull Call Spread Example : Assuming QQQ at $44. Buy To Open 10 QQQ Jan44Call for $1.05, Sell To Open 10 QQQ Jan45Call for $0.50. Net Debit = $1.05 - $0.50 = $0.55 If you expect QQQ to go up to near $46 by expiration, you will Sell to Open QQQ Jan46Call instead.

Choosing Strike Prices For Bull Call Spread

The choice of which strike price to write the out of the money leg for a bull call spread depends on the price you expect the underlying stock to rise to by expiration. In our example above, we are expecting QQQ to rise moderately from $44 to $45 by expiration of the bull call spread position. Remember, you use the Bull Call Spread only if you expect the underlying stock to rise moderately.

You can write the out of the money leg at a higher strike price if you wish bearing in mind that the higher the strike price, the lesser the extrinsic value becomes and it quickly come to a point where the value is too low for a meaningful write.

OTM Bull Call Spread

The Out of the Money Bull Call Spread is an extremely popular variant of the bull call spread used mostly by institutional speculators to speculate in explosive moves on the underlying stock using very little money. An OTM Bull Call Spread involves buying out of the money call options and then writing further out of the money call options against it.

Buy OTM Call + Sell Further OTM Call

Out of the Money Bull Call Spread Example : Assuming QQQ at $44. Buy To Open 10 QQQ Jan46Call for $0.30, Sell To Open 10 QQQ Jan47Call for $0.10. Net debit = $0.30 - $0.10 = $0.20

The Out of the Money Bull Call Spread is a speculative position that can be put on very cheaply. It makes a profit only when the underlying stock rallies beyond the strike price of the long call options and reaches it's maximum profit potential when it equals or exceeds the strike price of the short call options. If the underlying stock do stage such an explosive rally, the return on investment using the out of the money Bull call spread would be much higher than the conventional bull call spread outlined above. However, the risks are significant as well. If the stock rallies but fails to exceed the strike price of the out of the money long call options, the whole position expires worthless. Such trade-off between ROI and risk is prevalent in all options trading strategies.

Bull Call Ladder Spread

The capital outlay of a Bull Call Spread can also be further reduced by transforming the Bull Call Spread into a Bull Call Ladder Spread, also known as a Long Call Ladder Spread, by adding an extra higher strike price out of the money short call to the position.

Read the full tutorial on Bull Call Ladder Spread.

Trading Level Required For Bull Call Spread

A Level 3 options trading account that allows the execution of debit spreads is needed for the Bull Call Spread. Read more about Options Account Trading Levels.

Profit Potential of Bull Call Spread

A Bull Call Spread profits if the stock goes up. When the stock goes up, the long call option profits while the short call option continue to decay in premium until it's strike price has been reached. From that point onwards, every move in the long call option is matched by an equal move in the short call option, resulting in no further profits.

The maximum profit potential of a bull call spread is therefore when the price of the underlying asset rises up to the strike price of the out of the money short call options and beyond.

The profitability of a bull call spread can also be enhanced or better guaranteed by legging into the position properly.

Profit Calculation of Bull Call Spread

Maximum Possible Profit = Difference in strikes - Net Debit

Following up from the above Bull Call Spread example: Buy to open 10 QQQ Jan44call for $1.05 per contract and sell to open 10 QQQ Jan45call for $0.60 per contract Max. Possible Profit = (45 - 44) - (1.05 - 0.60) = 0.55 Max. Risk = Net Debit = $1.05 - $0.60 = $0.45, if QQQ is < $44

Risk / Reward of Bull Call Spread

Upside Maximum Profit: Limited

Maximum Loss: Limited
Net Debit Paid

Break Even Point of Bull Call Spread

BEP: Strike Price of Long Call Option + Net Debit Paid

Breakeven point of Bull Call Spread Buy to open 10 QQQ Jan44call for $1.05 per contract and sell to open 10 QQQ Jan45call for $0.60 per contract Break Even = Lower Strike + Net Debit = $44 + $0.45 = $44.45

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Bull Call Spread Greeks

Delta : Positive
Delta of a Bull Call Spread is positive at the start. As such, its value will increase as the price of the underlying stock increases.

Gamma : Negative
Gamma of a Bull Call Spread is negative and will decrease delta as the price of the underlying stock increases, resulting in a completely delta neutral position if the stock rallies past the strike price of the short call option.

Theta : Negative
Theta of a Bull Call Spread is negative and will therefore lose value due to time decay as expiration approaches.

Vega : Decreases with Length of Expiration
Vega of Short Put Ladder Spread is positive when near term options are used but will become increasingly negative as longer expiration options are used. This is due to the fact that out of the money options becomes more sensitive to changes in implied volatility at longer expiration than shorter expirations.

Advantages Of Bull Call Spread

:: Loss is limited if the underlying financial instrument falls instead of rise.

:: If the underlying instrument fails to rise beyond the strike price of the out of the money short call option, the profit yield will be greater than just buying call options.

:: It is also a way of buying call options at a discount by selling the out of the money call option at a strike price beyond that which the underlying instrument is expected to rise.

:: ROI is higher than just buying call options when stock closes at strike price of short call options.

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Disadvantages Of Bull Call Spread

:: There will be more commissions involved than simply buying call options.

:: There will be no more profits possible if the underlying instrument or stock rises beyond the strike price of the out of the money call option.

Adjustments for Bull Call Spread Before Expiration

1. If the underlying instrument or stock is expected to continue to rise strongly beyond the strike price of the short call option, one could buy to close the out of the money short call option and then sell to open a further out of the money call option in its place.

2. If the underlying instrument or stock is expected to continue to rise strongly beyond the strike price of the short call option, one could also choose to buy to close the out of the money short call option and then simply allow the long call option to continue to gain in value.

3. If it is clear that the underlying stock would not move explosively, one could write an additional higher strike price out of the money call option, transforming the position into a Long Call Ladder Spread in order to further reduce capital outlay and breakeven point.

4. If the price of the underlying stock is expected to retreat upon reaching the short strike price, one could close out the long call leg when the short strike price is reached and then buy out of the money call options to transform the position into a Bear Call Spread. This transformation can be automatically performed without monitoring using a Contingent Order.

Bull Call Spread Questions

:: What Happens If the Short Leg of My Bull Call Spread Is Assigned?
:: Bull Call Spread on AAPL?
:: How Do I Close Out a Bull Call Spread?
:: What To Do When One Leg of Bull Call Spread Is Assigned?
:: Should I Use In The Money Bull Call Spread For Short Term Trading?
:: What To Do With Profitable Bull Call Spread?
:: Closing a Losing Bull Call Spread?
:: How To Take Profit On Bull Call Spread?
:: Strategies for ITM Bull Call Spread With Time To Expiration?