A Bull Call spread is an options strategy where a trader buys a lower strike call and simultaneously sells an equal number of call options with the same expiration month but at a different higher strike.
This can be a good strategy to use if you expect the stock has the ability to rise more than it falls. It is the most popular of the bullish spread strategies.
A Bull Call spread can be called a “vertical” or “debit” spread because it uses the same expiration month but different strike prices and it is also an options spread where the premium of the bought option is greater than the premium of the sold one. In a bull call spread the investor pays a net premium so they have a debit balance.
Why create a Bull Call spread? If the market is moderately bullish and has some volatility, if you use a Bull Call spread you can minimize your cash invested in a position and minimize your risk. You end up still reaping a little higher profit potential because you are essentially hedging your investment. Your potential loss is limited to the premium you paid for the calls, minus the commissions and the premium you collected for the calls you sold. This spread is a strategy commonly used and usually offers good liquidity.
Bull Call Spread Disadvantages
- Your commission expense is a little higher.
- It can be a little more complicated than just buying a put or call so you have to know what you are doing.
- If the stock goes up, you return is not as high as buying just a straight call option.
- If the stock continues to soar, you are gains are limited.
Bull Call Spread Advantages
- There is less capital outlay so your risk can be lower if you are wrong.
- If the stock goes down and you are confident in your prediction, you can close the higher strike sell call position and then sell it again when the stock goes back up.
Visa Bull Call Spread Examples
Visa, Inc. (V) was an initial public offering (IPO) in March, 2008. After a month of trading the stock began a bullish trend. The stock began its first pullbacks in early May. If expectations are for this stock to remain moderately bullish in the near-term, a June Bull Call spread is worth checking out. We explore Buying an at-the-money or out-of-the money June call and Selling a call further away from the money than the June call purchased. We have around 30 days before expiration, and we believe it is reasonable to expect a push back into the $90 range or higher in that time frame.
Using the Spread Select feature within EduTrader we identify two attractive Bull Call spreads. The first Bull Call spread we Buy the June 85 strike and Sell the June 90 strike. Under this Bull Call spread strategy the maximum we risk is $165 and the maximum profit we would be able to receive is $335.
The second Bull Call spread we buy the June 85 and sell the June 95 strike. We could lose about $282.50 yet make more if Visa pushes above $95 in the next 30 days, as it has larger maximum profit potential around $717.
