From free introductory classes to advanced trading strategies, we aim to help you increase your knowledge and trade smarter. Let's make investing easier and not alone.
-Moomoo News Team
The bull call spread is one of the most popular forms of spreading. In this type of spread, one buys a call at a certain striking price and sells a call at a higher striking price.
Generally, both options have the same expiration date. This is a vertical spread. A bull call spread tends to be profitable if the underlying stock moves up in price, hence, it is a bullish position. The spread has both limited profit potential and limited risk. Although both can be substantial percentagewise, the risk can never exceed the net investment. In fact, a bull call spread requires a smaller cost and therefore has a smaller maximum loss potential than does an outright call purchase of a similar call.
Example
If an underlying stock is currently trading at $32. A bull spread could be established by buying the July 30 call with a debit premium of $3 and simultaneously selling the July 35 call with a credit premium of $1. Assume that this could be done at the indicated $2 debit. ($3-$1=$2 debit, a call bull spread is always a debit transaction, since the call with the lower striking price must always trade for more than a call with a higher price).
Maximum profit and loss
The spread will have a maximum profit and this profit is realized if the stock is anywhere above the higher price at expiration ($35-$30-$2 debit paid in front=$3). The maximum loss is realized if the stock anywhere below the lower strike at expiration, and is equal to the net investment, $2 in this example. Moreover, there is a break-even point that always lies between the two striking prices at expiartion. In this example, the break-even point is $32 ($32-$30-$2 debit paid in front=0).
The investor who establishes this position is bullish on the underlying stock, but is generally looking for a way to hedge himself. If he were aggresively bullish, he would buy the July 30 call outright. Howeverm the sale of July 35 call against the purchase of the July 30 call allows him to take a position that will outperform the outright purchase of the July 30 call, as long as the stock does not rise above $36 by expiration.
Therefore, the strategist establishing the bull spread is bullish, but not overly so.
Editor: Eli