The bull call spread option trading strategy is initiated when the options trader expect the price of the underlying asset will go up reasonably in the short term. Bull call spread can be executed by buying an at-the-money (ATM) call option while simultaneously writing a higher striking out-of-the-money (OTM) call option of the same underlying security of same expiration month.
Bull Call Spread Formula
- Buy 1 ATM or ITM Call.
- Sell 1 OTM Call.
By selling the out-of-the-money call, the options trader reduces the cost of the bullish position but limits the chance of making a large profit in the event that the underlying asset price shoots up drastically.
Maximum profit is realized for bull call spread options strategy when the stock price move above the higher strike price of the two calls and it is equal to the difference between the strike price of the two call options minus the initial debit taken to enter the position.
- Max Profit = Strike Price of Short Call – Strike Price of Long Call – Net Premium Paid – Brokerage Paid.
- Max Profit Achieved When Price of Underlying >= Strike Price of Short Call
The bull call spread option strategy will result in a loss if the stock price declines at expiration. Maximum loss cannot be more than the initial debit taken to enter the spread position.
- Max Loss = Net Premium Paid + Brokerage Paid.
- Max Loss Occurs When Price of Underlying <= Strike Price of Long Call.
When the price of underlying asset is is equal to sum of strike price of long call and net premium paid.
- Breakeven Point = Strike Price of Long Call + Net Premium Paid.
Bull Call Spread Example
An options trader thinks that ABC stock trading at $63 is going to move up soon and enters a bull call spread by buying a JAN 60 call for $150 and writing a JAN 70 call for $50. The net investment required to execute the spread is a debit of $100.
The stock price of ABC begins to rise and closes at $71 on expiration date. Both options expire in-the-money with the JAN 60 call having an intrinsic value of $550 and the JAN 70 call having an intrinsic value of $50. This means that the spread is now worth $500 at expiration. Since the trader had a debit of $100 when he bought the spread, his net profit is $400.
If the price of ABC stock had declined to $58 instead, both options value will be zero at expiry. The trader will lose his entire investment of $100, which is also his maximum possible loss.