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Bull Call Spread Options Trading Strategy Explained

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

Bull Call Spread

Bull Call Spread Options Strategy

Strategy LevelBeginners
Instruments TradedCall
Number of Positions2
Market ViewBullish
Risk ProfileLimited
Reward ProfileLimited
Breakeven PointStrike 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 ₹60. The net premium paid here is ₹110 which is also your maximum loss.

Bull Call Spread of NIFTY
Current Nifty10,500
Option Lot Size75
Strike Price of Call Option₹10,300
Premium Paid₹170
Strike Price of short Call Option10,700
Premium Received₹60
Net Premium Paid₹110
Break Even Point
(Strike Price of bought call + Net Premium)
10,410

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 ₹170. Now it is ₹110.
  • It has also brought down the extent of the loss. If only the Call Option was purchased, the maximum loss would have been ₹170. Now it is ₹110.

Bull Call Spread Strategy Payoff Schedule

Payoff Schedule
Payoff from
Nifty on ExpiryLong Call Option
(SP-BEP)
BEP = 10,470
Max Loss = 12750
Short Call Option
(BEP-SP)
BEP = 10,760
Max Profit = 4500
Net Payoff(₹)
9,700-127504500-8250
9,900-127504500-8250
10,100-127504500-8250
10,200-127504500-8250
10,410-450045000
10,6009750450014250
10,80024750-300021750
bull call spread strategy example nifty

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

Risk Profile of Bull Call Spread

Limited

The trade will result in a loss if the price of the underlying decreases at expiration. The maximum loss is limited to net premium paid.

Max Loss = Net Premium Paid

Max Loss happens when the strike price of Call is less than or equal to price of the underlying.

Reward Profile of Bull Call Spread

Limited

Limited To The Difference Between Two Strike Prices Minus Net Premium

Maximum profit happens when the price of the underlying rises above strike price of two Calls. The profit is limited to the difference between two strike prices minus net premium paid.

Max Profit = (Strike Price of Call 1 - Strike Price of Call 2) - Net Premium Paid

Max Profit Scenario of Bull Call Spread

Both options exercised

Max Loss Scenario of Bull Call Spread

Both options unexercised

Advantage of Bull Call Spread

Instead of straightaway buying a Call Option, this strategy allows you to reduce cost and risk of your investments.

Disadvantage of Bull Call Spread

Profit potential is limited.

How to exit?

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

Simillar Strategies

Collar, Bull Put Spread

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