BAJAJ BROKING
February 11, 2025
6 mins read
In this blog, we will discuss Bull Call Spread and how this options trading strategy works. We will talk about its benefits and limitations and we will also see an example of how to apply this strategy.
A Bull Call Spread is a smart way to trade in options. It’s a strategy where the trader buys a call option and sells another. In this way, the trader can gain if the asset price increases just a little. At the same time, risks and costs are at a reasonably low level. This involves two call options that have two different strike prices but expire at the same time: one with a lower strike price and was bought, and the other was sold at a higher strike price.
The long call, or purchased option, brings profits when the price of the underlying rises. However, buying a call option alone is very expensive. To make such an expense easier to stomach, the trader sells a short call with a higher strike and receives a premium that reduces the cost of the trade overall. This decreases both the break-even point and the highest loss but limits the biggest profit.
The Bull Call Spread option strategy is suitable for a trader who feels that the price of an asset is going to go up a little but not very much above the higher strike price. This type of spread often comes in handy in markets that tend to range-bound or slowly increase in prices. The Bull Call Spread gives a clear outline of the risk and reward to the trader and keeps him from losing money unnecessarily.
The Bull Call Spread Option Strategy works like this. It leverages the benefits of holding a long call and short call together. This helps you take advantage of rising prices and it also reduces exposure to risk.
Long Call (Lower Strike Price)
The trader buys a call option from someone, with a strike price that is higher than current price of the asset, but is still close to the current price. As per the option the trader can purchase the asset at the strike price. In case, the price of the asset goes above the strike price, the profit potential is significantly high.
Short Call (Higher Strike Price)
The trader sells a call option to someone, with a strike price that is higher than the strike price of the option they bought. As per the option the trader has to sell the asset at the strike price if the buyer exercises the option. This ensures that the trader can earn a high profit should the price rise as expected.
Net Debit:
The overall cost of the strategy is termed net debit, and it equals the total of the premium paid for the long call (call option bought) minus the premium received from the short call (call option sold).
Profit Zone
Profit zone for the Bull Call Spread (if gains occur) is in the difference between the price of the asset and its updated price. The net debit is the breakeven point.
Risk Limitation
An advantage of the Bull Call Spread is that it limits the maximum risk to the net debit amount. This happens when the price of an asset goes down below the lower strike price, at the time of its expiry.
Step 1: Buy a call option at a lower strike price (long call).
Step 2: Sell a call option at a higher strike price (short call).
Step 3: Calculate the net debit (premium paid for the long call minus premium received from the short call).
Step 4: Monitor price movement and expiration.
Step 5: Profit if the underlying asset’s price exceeds the breakeven point but remains below the higher strike price.
Step 6: Risk is capped at the net debit if the asset’s price stays below the lower strike price.
The Bull Call Spread option strategy is designed to strike a balance between cost management and profit potential. Unlike buying a single call option, which can be expensive, a Bull Call Spread mitigates costs by incorporating a short call. This makes it an attractive option for traders who are moderately bullish on an asset’s price movement.
This strategy serves two primary purposes:
Cost Efficiency:
By selling a call option at a higher strike price, the trader receives a premium that reduces the net cost of the trade.
This makes the strategy more accessible and minimizes the upfront capital required.
Risk and Reward Control:
The Bull Call Spread defines both the maximum profit and the maximum loss.
The capped profit may be a trade-off, but it provides clarity and reduces exposure to unexpected market events.
By leveraging this strategy, traders can target profits from gradual upward price movements while keeping risks under control.
Executing a Bull Call Spread requires careful planning and understanding of market conditions. Here is a step-by-step guide to creating this strategy:
1. Analyze the Market:
Confirm a moderately bullish outlook for the underlying asset.
Use technical and fundamental analysis to identify key price levels and trends.
2. Select the Expiration Date:
Choose an expiration date that aligns with the expected price movement.
Longer expiration dates provide more time for the asset to move in the desired direction, but they may involve higher premiums.
3. Choose Strike Prices:
Lower Strike Price: Select a call option with a strike price close to or slightly below the current price.
Higher Strike Price: Choose a call option with a strike price above the current price, limiting potential gains but reducing costs.
4. Execute the Trade:
Buy the Long Call: Pay the premium to purchase a call option at the lower strike price.
Sell the Short Call: Receive the premium by selling a call option at the higher strike price.
5. Calculate Net Debit:
Determine the total cost of the position by subtracting the premium received from the premium paid.
6. Monitor the Trade:
Regularly track the price movement of the underlying asset and any changes in volatility.
Consider adjusting the strategy if market conditions shift.
7. Exit the Position:
Close the trade before expiration to lock in profits or minimize losses.
Alternatively, let the options expire if the desired price levels are achieved.
To fully understand a Bull Call Spread, it is essential to calculate potential profits, losses, and the breakeven point.
Maximum Profit:
Formula: Maximum Profit = (higher strike price - lower strike price) - (Net debit)
Occurs when the underlying asset’s price is at or above the higher strike price at expiration.
Maximum Loss:
Formula: Maximum Loss=Net Debit Paid
Occurs if the underlying asset’s price remains below the lower strike price at expiration.
Breakeven Price:
Formula: Breakeven Price=Lower Strike Price+Net Debit Paid
By understanding these calculations, traders can evaluate the potential outcomes of their strategy.
Advantages | Disadvantages |
Lower Cost: Reduces the premium cost by selling a call. | Limited Profit: Gains are capped due to the short call. |
Defined Risk: Maximum loss is predetermined and limited. | Moderate Outlook: Unsuitable for highly bullish expectations. |
Hedge Against Volatility: Protects against drastic price drops. | Complexity: Requires understanding of options dynamics. |
The Bull Call Spread option strategy is effective for traders in a moderately bullish market outlook. By combining a long call and a short call, it reduces costs and limits risks, offering a balanced approach to trading. While its capped profit potential may not appeal to aggressive traders, its defined risk-reward profile makes it a practical choice for those seeking steady gains with controlled exposure.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Share this article: 
A Bull Call Spread is a strategy that uses call options and profits from a moderate price increase, involving an upfront cost (net debit). A Bull Put Spread uses put options and profits from price stability or moderate increases, with the generation of upfront income (net credit).
The key cons are limited potential for profit, reliance on partial price rise, and the impact of time decay in the premium.
To make profits, one would select proper strikes, monitor it, and sell when the stock price reaches almost the higher strike near expiration.
Yes, safer because the risk is capped. However, profit is also limited, unlike naked call which can have unlimited profit potential but more risk
Yes, but best suited for moderate price increases. Excessive volatility may increase costs, reducing net profitability.
If the stock price remains below the lower strike price, the maximum loss is incurred, which is capped at the net premium paid.
Lower strike prices increase the likelihood of profit but are more expensive. Higher strike prices decrease the cost but cap the profit.
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