Bull Call Spread

An options strategy where an investor buys a call option and sells another call option with a higher strike price on the same underlying asset and expiration.

A bull call spread is a bullish options strategy designed to profit from a moderate rise in the price of an underlying asset. It is constructed by purchasing a call option with a lower strike price (which is more expensive) and simultaneously selling (writing) another call option with a higher strike price (which is cheaper) on the same asset and with the same expiration date. By selling the higher-strike call, the investor collects a premium that partially offsets the cost of buying the lower-strike call. This reduces the overall cost of the trade and caps the maximum potential loss to the net premium paid. However, in exchange for this lower cost and risk, the investor also caps their maximum potential profit at the difference between the two strike prices minus the net premium paid. This strategy is highly favored by tactical investors who want to participate in an upward move of a stock while strictly limiting their downside risk, especially when high volatility makes buying outright calls too expensive. A key risk is that if the stock price remains below the lower strike price at expiration, both options will expire worthless, resulting in a total loss of the net premium paid.

An investor buys a $1,000 call option on Stock A for $50 and sells a $1,200 call option on Stock A for $15. The net debit (cost) to enter the trade is $50 - $15 = $35, which is also the maximum possible loss. The maximum potential profit is the difference between the strikes ($1,200 - $1,000 = $200) minus the net debit ($35), which equals $165 per share.