Bull Call Spread

Definition

A Bull Call Spread is an options strategy designed to profit from a moderate rise in the price of the underlying asset. * It involves buying a Call Option and selling another Call Option with a higher strike price to offset the cost. * It is also known as a Long Call Spread or Debit Call Spread.

Setup

You trade two calls with the same expiration date: 1. Buy a Call: At a lower strike price (Usually ITM or ATM). 2. Sell a Call: At a higher strike price (Usually OTM).

Why use it?

• Cost Reduction: Selling the higher strike call generates premium, which subsidizes the cost of the long call. This makes the trade cheaper than buying a naked call.
• Theta Protection: The short call helps mitigate the negative impact of time decay (Theta).
• Targeted Outlook: You expect the stock to go up, but not to the moon. You are willing to cap your upside in exchange for a lower entry price.

Risk & Reward Profile

• Max Profit: Limited to the spread width minus the net debit paid.
  • Once the stock price surpasses the higher strike price, your profit is capped.
• Max Loss: Limited to the net debit paid upfront.
  • Occurs if the stock price finishes below the lower strike price at expiration.

Key Takeaway

"Lower cost, limited upside." It is a disciplined way to bet on a bullish move without paying full price for volatility.