A bull call spread is an independant trade, that uses a combination of two calls, but is still a single direction strategy. The trader buys a single call contract at any strike price, and then sells a single call contract at a higher strike price (i.e. farther out of the money). The profit comes from the difference in the strike prices of the two calls. If the price moves up a small amount, the long call will go into profit, but the short call will not, and if the price moves up by a large amount, both calls will go into profit. If the price moves down, neither call will go into profit. The trade is entered at a debit (the long call costs more than the premium received for the short call), and is therefore a debit spread strategy.
Making a Bull Call Spread
- Purchase a single at the money call contract
- Sell a single out of the money call contract
- Wait for the price to move above the long call strike price plus the long call premium
- Exercise the long call (and if necessary, complete the short call transaction) to realize the profit.
Risk and Reward
As shown on the risk / reward chart (view the full size chart), the risk of a bull call spread is low, and is limited to the initial debit taken when entering the trade (the cost of the long call minus the premium received for the short call) regardless of how far the price moves down (against the trade). The risk of a bull call spread is calculated as :
Maximum Risk = Initial debit
Loss = Long call premium - Short call premium (i.e. net premium)
The reward of a bull call spread is limited to the difference between the strike prices of the long and short calls, minus the initial debit taken when entering the trade. The profit of a bull call spread is calculated as :
Maximum Profit = Short call strike price - Long call strike price - Initial debit
Profit = Stock price upon expiration - Long call strike price - Initial debit
