Bull Spread

What Is a Bull Spread?

A bull spread is an options strategy used when an investor expects the price of an underlying asset to rise moderately. It combines two options of the same type and expiration date but with different strike prices. The trader buys one option and sells the other. The sold option offsets part of the cost of the bought option, which lowers the upfront expense but also caps the potential gain.

How It Works

Bull spreads can be built with call options or put options:

• Bull call spread: buy a call at the lower strike and sell a call at the higher strike. This usually requires a payment upfront, known as a net debit.
• Bull put spread: sell a put at the higher strike and buy a put at the lower strike. This usually produces a net credit received upfront.

In both versions, the maximum loss and maximum profit are fixed when the trade is opened. For a bull call spread, the maximum loss is the net debit paid, and the maximum profit is the difference between the strikes minus that debit. The full profit is reached when the underlying asset is at or above the higher strike at expiration.

Maximum profit (bull call spread) = (higher strike − lower strike) − net debit

Example

Consider a hypothetical stock trading at 50. An investor buys a call with a strike of 50 for a premium of 4 per share and sells a call with a strike of 55 for a premium of 1.50 per share. The net debit is 2.50 per share. If the stock is at or above 55 at expiration, the spread is worth 5 per share, for a profit of 2.50 per share. If the stock is at or below 50, both calls expire worthless and the investor loses the 2.50 paid. Outcomes between those prices fall on a sliding scale.

Why It Matters and Trade-Offs

Bull spreads let investors express a moderately bullish view with defined risk and a lower upfront cost than buying a single call. The short option, however, limits gains. Other considerations include time decay, which affects the two legs differently depending on their position relative to the underlying price; commissions, which can be significant relative to small per-share profits; and assignment risk, where the short option may be exercised before expiration, especially with American-style options. Traders also watch implied volatility, because changes in it can affect the spread's value even when the underlying price moves little.