PREMIUMBull Call Spread
Overview:
The bull call spread is popular because it’s a low-risk, low-return strategy. The strategy is employed when a call is bought, and a higher-strike call (with the same expiration date) is simultaneously sold.
Main Uses:
- The first reason an investor would use this strategy is if the investor is feeling moderately bullish about the underlying stock. The investor is hoping for a modest upturn in the underlying stock.
- The second reason an investor would use this strategy is if he or she is neutral on a stock. If the sold call has a higher vega than the purchased call, the investor will make money at expiration as long as the stock has not moved lower. The underlying stock does not need to rally, it just needs to not fall.
Profit / Loss Bull Call Spread:
The below graph is a profit / loss graph of a bull call spread using the OptionsHouse P&L calculator with VMW as the ticker. The current stock price is $45.50. An in-the-money call was bought at the 25 strike for $22. Simultaneously, an out-of-the-money call was sold at the 50 strike for $6. The break-even price of the spread is $41, or the strike of the long call plus the $16 premium paid. If the stock price stays above $41, the investor will make money. However; if the stock price closes below $41 at expiration, the investor will lose money. Losses are limited to the debit paid at the outset of the trade, and maximum gains are capped at the difference between strike prices minus the premium paid.
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