What is a Bull Call Spread?
A Bull Call Spread involves buying a call option at a lower strike price and selling a call option at a higher strike price. It’s used when you expect the stock price to increase moderately, and it limits both your profit and your risk.
- You buy a call option with a lower strike price (e.g., $100).
- You sell a call option with a higher strike price (e.g., $110).
- You pay a net debit (the premium difference) to enter this strategy.
How Payoff Works:
If the stock price rises above the higher strike price, your profit is capped. If the stock price falls below the lower strike price, your maximum loss is the net debit paid.
Example Payoff Scenarios:
- Stock Price = $90: Both options expire worthless. Your payoff is the net debit (maximum loss).
- Stock Price = $105: You exercise the bought call at $100, but the sold call expires. Payoff = ($105 - $100) × 100 - net debit.
- Stock Price = $120: Maximum profit because both calls are exercised. Payoff = ($110 - $100) × 100 - net debit.