Bull Call Spread
IntermediateA bull call spread is an options strategy that involves buying a call option and selling another call option with a higher strike price on the same asset and expiry, to profit from a moderate price rise at a lower cost.
Buying a call on its own can be expensive. Selling a higher-strike call reduces the net cost, but it also caps the maximum profit.
For example, with a share trading at 50, an investor buys a call with a strike of 50 for 4 and sells a call with a strike of 55 for 1.50. The net cost is 2.50. If the share rises to 55 or above at expiry, the spread is worth the difference between the strikes, 5, giving a maximum profit of 2.50. If the share stays at or below 50, both options expire worthless and the investor loses the 2.50. The break-even price is 52.50.
The bull call spread suits investors who expect a moderate rise but not a dramatic one. It limits both the potential loss and the potential gain.
Compared with buying a single call, it costs less and breaks even sooner, but gives up the possibility of large profits if the share price soars. A similar strategy for expected falls, using puts, is called a bear put spread.
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