Bull (Long) Call Spread

A bull call spread is a fundamental bullish spread in options trading, composed of two call options with different strike prices that expire in the same month, where a “LOWER” call strike is purchased and a “HIGHER” call strike is sold, simultaneously.  Think of the basic definition of buying a call option and selling a call option to understand how the simultaneous purchase/sale of options would work!!

By buying a “lower strike” call option, you gain the “right” to purchase shares at a given price and by selling a “higher strike” call option; you undertake an “obligation” to deliver (sell) those same shares at a higher price.  For example, by simultaneously buying a 40 call strike and selling a 45 call strike, you have just gained the right to purchase shares at $40 and taken on the obligation to sell them at $45.  Therefore, the most you can make or the bull call spread can be worth is $5, the difference between the two strikes!!

Maximum Value of Spread = Difference between the Strike Prices

By combining a long call option with a short call option, we are able to create a bull call spread, also referred to as a long (buying) call spread.  Take a look at the risk profile below for further clarification:

Now that we understand how a bull call spread functions, let’s look at a current example.  Let’s say that you are bullish on Google (GOOG) and after looking at GOOG’s option chain below you decide that a straight call is too expensive.  For a 640 call you would be paying a debit of $17.10 or $1710.  With Google at $627, you decide that a 640/650 call spread would work best with over a month remaining until expiration.

The 640 call could be bought for $17.10, while the 650 call could be sold for $13.00.  Combining the two call options together would create a bull call spread, which would cost a total debit of $4.10 or $410.  Since the spread can be worth only $10 (difference between strikes), the most you could make on this trade would be $10 – $4.10 = $5.90, at expiration.

Basically, you would be risking a debit of $4.10 (max loss) to make $5.90 (max profit).  Max. Risk (Loss) = Debit Paid

Max. Profit = Difference between Strike Prices – Debit Paid

The bull call spread would breakeven once the debit paid ($4.10) to enter the trade is recovered.  In this case, your breakeven would be $640 + $4.10 or $644.10.  Google would have to reach this point in order for you to breakeven on the trade.

Breakeven = Long Call Strike + Debit Paid to enter spread

Now that we know how a bull call spread functions, let’s look at the several advantages of this strategy:

• Lower cost than buying a straight call because you are also selling an option
• Spread can be morphed into other advanced strategies

I personally trade vertical spreads more often than straight calls and puts because they offer numerous advantages like the ones listed above.  The next vertical spread we will cover is the bear call spread.