1. Introduction: The Strategy's Foundation
The bull call spread is a strategy designed to profit when the underlying asset moves upward. It involves buying one call option and simultaneously selling a higher-strike call option. Unlike the credit spreads you've reviewed, this strategy is a debit spread, meaning you pay a net amount upfront to enter the trade, and this payment represents your maximum loss.
Let's use a specific example with SPY (the S&P 500 ETF Trust).
Scenario: SPY is currently trading at $672.35. You are moderately bullish and expect SPY to rise, but you want to define your risk for the Dec 19th expiration (42 days).
Goal: Seek a profit if SPY rises, but strictly limit the cost and risk of the trade.
Solution: Enter the bull call spread!
2. Understanding Debit Spreads
Unlike the credit spreads we've discussed, a Debit Spread means you pay money upfront—a net debit—to enter the trade. This net debit is your maximum loss. You hope the spread increases in value so you can sell it later for a net credit, which is how you make your profit. The bull call spread is a debit spread because the option you buy (the lower strike) is more expensive than the option you sell (the higher strike).
The Bull Call Spread is a 'DEBIT SPREAD'.
Debit Spreads: You pay more for the option you buy than you receive for the option you sell (a net debit). This initial debit is your maximum risk.
3. Bull Call Spread Construction and Example
Bull Call Spread Construction
The bull call spread is constructed entirely with call options on the same underlying asset and the same expiration date.
Bull Call Spread = Buy Lower-Strike Call + Sell Higher-Strike Call
The Long Leg (Directional Bet): You buy one call option at a lower strike price (e.g., at $675). This is the driver of your profit.
The Short Leg (Cost Reduction/Cap): You simultaneously sell one call option at a higher strike price (e.g., at $679). This offsets some of the cost of the long leg but limits your maximum profit.
Ratio: The ratio of long calls to short calls must be 1:1.
The call option you buy (the lower strike, which is closer to the money) has a higher premium than the call option you sell. Therefore, the bull call spread will always be established for a net debit.
Net Debit (Max Loss) = Premium Paid (Long Call) - Premium Received (Short Call)
SPY Example
We use the Dec 19th Expiry (42 days).
SPY Current Price: $672.35
Action: Buy the $675 Call for $14.25 (Long Leg)
Action: Sell the $679 Call for $11.91 (Short Leg)
Net Debit Paid: $14.25 - $11.91 = $2.34 (or $234 total per contract)
This creates a $675/$679 Bull Call Spread for a $2.34 debit. Your forecast is moderately bullish, expecting a rally beyond $675.
4. Risk and Reward Profile
Maximum Loss (Risk)
The maximum loss is limited to the net debit initially paid to enter the trade. This occurs if SPY closes at or below the lower strike price ($675) at expiration.
Max Loss = Net Debit Paid
SPY Example: Max Loss = $2.34 or $234 per contract.
Maximum Profit (Reward)
The maximum profit is limited to the difference between the strike prices minus the net debit initially paid. This profit occurs if SPY closes at or above the higher strike price ($679) at expiration.
Max Profit = (Difference in Strike Prices) - Net Debit Paid
SPY Example:
Strike Difference: $679 - $675 = $4.00
Max Profit: $4.00 - $2.34 = $1.66 (or $166 per contract)
Return on Investment (ROI)
ROI = Max Profit\Max Risk times 100
SPY Example: $166\$234 times 100 = 70.94%
This high potential return demonstrates that debit spreads are often used for high reward scenarios, even though the probability of achieving maximum profit is generally lower (PoP 46%).
5. Break-Even Point and Strategy Trade-Off
Break-Even Point (at Expiration)
The break-even price is the lower strike price plus the net debit paid.
Break-Even Price = Lower Strike Price + Net Debit Paid
SPY Example: 675.00 + $2.34 = $677.34
Strategy Trade-Off: Probability vs. Reward
Probability: The Probability of Profit (PoP) is 46%. This is less than the PoP offered by out-of-the-money credit spreads (which are typically 70%+).
Reward: The trade is structured for high reward, with a potential ROI of nearly 71% if the stock rallies above the higher strike ($679).
Conclusion: The bull call spread is for investors who are more confident in the stock's directional movement and are willing to accept a higher loss probability in exchange for a higher return potential. Your risk is defined by the debit paid.
6. The Greeks: Understanding Strategy Dynamics
The Greeks for the bull call spread are different because it's a net long position.
Delta is large and positive, meaning you profit significantly when the stock moves up—this is your directional bet.
Theta is negative, meaning time decay works against you, eroding the value of your spread every day. This is why these spreads are often opened with less time to expiration and managed aggressively.
Calculating Net Greeks
We use the provided data:
$675 Call (Long): Delta 0.513, Theta -0.212, Vega 0.907
$679 Call (Short): Delta 0.466, Theta -0.201, Vega 0.893
Impact of Direction (Delta)
The spread has a small, positive net Delta, indicating a strong bullish bias.
SPY Example Net Delta: (Long Call Delta) - (Short Call Delta)
$0.513 - 0.466 = +0.047
This means the value of the spread will increase (profit for you) by about $4.70 for every $1.00 rise in SPY.
Net Delta = Long Call Delta (Positive)} - Short Call Delta (Negative)
Impact of Time Decay (Theta)
The long call (lower strike) loses time value slightly faster than the short call. This results in a negative net Theta.
SPY Example Net Theta: (Long Call Theta) - (Short Call Theta)
-0.212 - (-0.201) = -0.011
This means the spread theoretically loses about $1.10 per day due to time decay. Time is your enemy! You need a quick move up.
Net Theta = Long Call Theta (Negative) + Short Call Theta (Positive)
Impact of Volatility (Vega)
The bull call spread is typically a net long Vega position (positive). This means the spread gains value if implied volatility (IV) rises, and loses value if IV falls.
SPY Example Net Vega: (Long Call Vega) - (Short Call Vega)
0.907 - 0.893 = +0.014
7. Picking the Strikes and Assignment Risk
Picking the Strikes
Debit spreads are often placed closer to the current stock price (or even slightly in-the-money) to increase the initial directional move. The narrow $4.00 wide spread between $675 and $679 maximizes the potential ROI for the debit paid.
Assignment Risk
Assignment on the short call leg ($679) is a risk if the option is deep in-the-money before expiration. However, since your long call ($675) is also in-the-money, you can always exercise the long call to cover the short assignment, thereby locking in your max profit. The risk of early assignment is usually managed by closing the spread before expiration if the maximum profit has been achieved.
8. Actions to take at Expiry
SPY closes below the Long Call ($675): Both options expire worthless. You realize the Max Loss (Debit Paid).
SPY closes above the Short Call ($679): Both options are in-the-money. You realize the Max Profit. Your broker will manage the closing positions.
SPY closes between the Strikes ($675 and $679): You realize a partial P&L.
Action: Close the entire trade by selling the spread for a net credit to lock in your profit or loss.
💡 Course Summary and Next Steps
The Bull Call Spread is a directional strategy that uses leverage to achieve high returns when the market moves strongly upward, accepting a lower probability of profit in exchange for a lower capital outlay (Max Loss) compared to buying a naked call.
Key Takeaways
Definition: The Bull Call Spread is a debit spread constructed by buying a lower-strike call and selling a higher-strike call (same expiration).
Trade Example (SPY $675/$679, 42 days):
Net Debit Paid (Max Loss): $2.34 ($234 total).
Max Profit: ($4.00 strike width) - ($2.34 debit) = $1.66 ($166 total).
Break-Even: $675 (Long Strike) + $2.34 (Debit) = $677.34.
ROI: $\approx \mathbf{70.94\%}$ over 42 days.
Probability vs. Reward: It is a low-probability (PoP 46%), high-reward strategy.
Greeks: It has negative Theta (time works against you), requiring a rapid move in the underlying asset.
Actionable Next Steps
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📉 Ready for the Bearish Counterpart?
You've mastered the Bull Call Spread, which profits when the market goes up. Now, explore the strategy that profits when the market goes down (or sideways), which we covered previously: the Bear Call Spread.
Online Broker Placing and Managing a Bull Call Spread
Test Your Knowledge 1
CLICK HERE to take the quiz
Test your knowledge 2
At this stage it is best if you start practicing for real so this is what we want you to do:
Pick any option able stock that you have a mildly bullish outlook
Place a Bull Call Spread
Do a profit & Loss table
Place the trade in a 'Simulated' or 'Demo' account with an online broker
Identify your breakeven
Identify your Max Loss
Identify your Max Profit
Share your insights on our daily members web meetings
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