The Bull Call Spread - also called call debit spread or long call vertical spread - is a Option strategy, which is related to the long call. Through the additional sale of a Call option a bull call spread can reduce the option premium to be paid (and thus the maximum possible loss) compared to a long call; on the other hand, the maximum possible profit is also limited.
Definition Bull Call Spread
A bull call spread is an option strategy that consists of a bought call option (long call) and a sold call option (short call) with a higher strike price.
The Bull Call Spread belongs to the category of Vertical spreads and is used at a bullish market opinion used. Since the sale of the call option generates a premium income, the costs compared to a Long Call lower. However, the unlimited profit potential of a long call is limited to the width of the spread (strike price short call - strike price long call) minus the paid Option premium limited.
P&L diagram of a bull call spread
In the profit and loss chart you can see that the profit of the bull call spread is limited when the underlying rises above the short call level.
What to look for when trading a bull call spread?
The Bull Call Spread achieves the maximum profit if the underlying is quoted at least at the level of the short call (or higher) on the expiration date. Regarding the selection of the strike prices of the Options can be acted flexibly according to the market assessment. For example, the long call can be in the money and the short call out of the money. Likewise, both options can be in-the-money or out-of-the-money. Depending on which strike prices are selected, the ratio of maximum possible profit to maximum possible loss (CRV) also changes.
Maximum loss
The maximum loss occurs if the underlying is quoted at the price level of the long call or lower on the expiration date.
Maximum loss = Net debit = Debit long call - Credit short call
Maximum and realized profit
If the price of the underlying is between the strike prices of the two options on the expiration date, the profit (or loss) is calculated as follows:
Profit = Price Underyling - Strike Price Long Call - Net Debit
The maximum profit is achieved when the underlying is quoted at least at the price level of the short call (or higher).
Maximum profit = strike price short call - strike price long call - net debit
Break Even Point
The break-even point can be calculated by adding the option premium paid (net debit) to the strike price of the long call. At this price level, the amount of the profit corresponds exactly to the option premium paid at the beginning.
Break Even Point = Strike Price Long Call + Net Debit