Bull Call Spread Option Trading Strategy Explained

Published on Wednesday, April 18, 2018 | Modified on Wednesday, June 5, 2019

Bull Call Spread Options Strategy

Strategy Level	Beginners
Instruments Traded	Call
Number of Positions	2
Market View	Bullish
Risk Profile	Limited
Reward Profile	Limited
Breakeven Point	Strike price of purchased call + net premium paid

A Bull Call Spread (or Bull Call Debit Spread) strategy is meant for investors who are moderately bullish of the market and are expecting mild rise in the price of underlying. The strategy involves taking two positions of buying a Call Option and selling of a Call Option. The risk and reward in this strategy is limited.

A Bull Call Spread strategy involves Buy ITM Call Option and Sell OTM Call Option.

For example, if you are of the view that NIFTY will rise moderately in near future then you can Buy NIFTY Call Option at ITM and Sell Nifty Call Option at OTM. You will earn massively when both of your Options are exercised and incur huge losses when both Options are not exercised.

When to use Bull Call Spread strategy?

A Bull Call Spread strategy works well when you're Bullish of the market but expect the underlying to gain mildly in near future.

Example

Suppose you are bullish on Nifty, currently trading 10,500, and expecting a mild rise in its price. You can benefit from this strategy by buying a Call with a Strike price of 10,300 at a premium of 170 and selling a Call option with a strike price 10,700 at a premium of Rs 60. The net premium paid here is Rs 110 which is also your maximum loss.

The Bull Call spread strategy has done 3 things:

• It has brought down the break-even point. If only the Call Option was purchased, the break-even point would have been 10, 470. Now it is 10,410.
• It has brought down the net premium. If only the Call Option was purchased, the premium paid would have been Rs 170. Now it is Rs 110.
• It has also brought down the extent of the loss. If only the Call Option was purchased, the maximum loss would have been Rs 170. Now it is Rs 110.

Bull Call Spread Strategy Payoff Schedule

Market View - Bullish

When you are expecting a moderate rise in the price of the underlying.

Actions

• Buy ITM Call Option
• Sell OTM Call Option

A Bull Call Spread strategy involves Buy ITM Call Option + Sell OTM Call Option.

For example, if you are of the view that Nifty will rise moderately in near future then you can Buy NIFTY Call Option at ITM and Sell NIFTY 50 Call Option at OTM. You will earn massively when both of your Options are exercised and incur huge losses when both Options are not exercised.

Breakeven Point

Strike price of purchased call + net premium paid

How to exit?

Buy back the sold call options and sell the bought call options

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