Options Academy
Bull Spreads 101: Defined Risk, Defined Reward
Want to be bullish but scared of the cost? The Bull Call Spread reduces your entry price and caps your risk. Learn the strategy that professionals use to trade efficiently.
The "Hedged" Bull
A Bull Call Spread (or Vertical Debit Spread) is a strategy where you buy a call option and simultaneously sell a higher strike call option with the same expiration date.
Why sell the second call? To reduce the cost of the trade. By collecting premium on the short leg, you lower your break-even point.
The trade-off: You cap your maximum profit. You are saying, "I think the stock will go up, but I don't think it will go to the moon immediately."
Example: The XYZ Spread
Stock XYZ is trading at $32.
1. Buy October 30 Call for $3.00.
2. Sell October 35 Call for $1.00.
Net Debit: $2.00 ($3 - $1).
Instead of paying $300 for the naked call, you pay only $200 for the spread.
Lower Strike (Buy)
$30.00
Higher Strike (Sell)
$35.00
Net Debit (Max Loss)
$2.00
Max Profit
$3.00
The Profit Formula
Max Profit: (Difference in Strikes) - Net Debit.
($35 - $30) - $2 = $3.00.
Max Loss: Net Debit Paid.
$2.00.
Break-even: Lower Strike + Net Debit.
$30 + $2 = $32.
Notice the break-even is exactly where the stock is trading ($32). If you had bought the naked call for $3, your break-even would be $33. The spread starts making money sooner.
The Payoff Diagram
The profit graph looks like a step. It rises and then flattens out at the short strike.
You make money as long as the stock stays above $32. You max out your profit if the stock hits $35.
Bull Spread P/L at Expiration
- profit
Key takeaways
- A Bull Spread involves buying a low strike call and selling a high strike call.
- It lowers your cost of entry and your break-even point.
- Your risk is limited to the Net Debit paid.
- Your profit is capped at the difference between the strikes minus the debit.
Series
Bull Spread Masterclass
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