What is Bull Call Spread: Strategy, Examples, Adjustment, Risks & Advantages

A bull call spread is a popular derivative trade strategy for options traders to limit their loss while trading call options. This bull call spread became the trader's favourite strategy because it was very easy to deploy. Let's understand the Bull Call Strategy more deeply in this article along with examples.

Key Highlights:

• A bull call spread strategy is used when a trader is assuming that the asset will increase in price.
• The strategy uses two call options: a lower strike price and an upper strike price.
• The bullish call spread can limit losses on owning the asset but also caps gains.

What is a Bull Call Spread?

A bull call spread is a common options trading strategy for stocks or indexes. This spread involves buying and selling call options with the same expiration date but different strike prices, like ITM, ATM, and OTM. 

With the bull call spread strategy, the trader can benefit from a stock's rise while limiting potential losses and gains. It’s an inexpensive way to get some exposure to a stock's upside potential without the full risk of owning the stock or buying a single call option. 

How a Bull Call Spread Works?

The Bull Call Spread can be traded by following the steps below,

• Buying a Call Option: Buying a call option at a lower strike price (ITM).
• Selling a Call Option: Simultaneously selling a call option at a higher strike price (OTM).

The premium paid for the bought call is initially offset by the premium received from the sold call, reducing the overall cost of the trade.

If the stock price rises above the lower strike price, the trader makes some profit, with maximum gains capped at the higher strike price. The risk is limited to the net premium paid.

Example of Bull Call Spread: Suppose XYZ Ltd. is currently trading at ₹100. You expect the stock to rise moderately over the next month, so you create a Bull Call Spread with a lot size of 100 shares.

• Buy one ₹100 Call Option (CE) by paying a premium of ₹6 per share.
• Sell one ₹110 Call Option (CE) and receive a premium of ₹2 per share.

Net premium paid: (₹6 − ₹2) × 100 = ₹400

Scenario 1: Stock rises to ₹115 at expiry

• The ₹100 Call Option is worth ₹15 per share (₹115 − ₹100), gives ₹1,500.
• The ₹110 Call Option is worth ₹5 per share (₹115 − ₹110), so you pay ₹500 as the option seller.
• Net profit: ₹1,500 − ₹500 − ₹400 (net premium) = ₹600

Scenario 2: Stock stays below ₹100 at expiry

Both call options expire worthless because the stock price is below the strike prices.

• Maximum loss: Limited to the ₹400 net premium paid.

This example shows how a Bull Call Spread allows you to benefit from a moderate rise in the stock price while keeping the maximum loss limited to the initial premium paid.

Bull Call Spread Adjustment

Adjustments depend on market conditions and your risk appetite. If the trade moves against you or the stock stalls, adjustments can be made:

• Roll the Short Call Higher: Move the short call to a higher strike and later expiry if the stock rises sharply to increase upside potential.
• Roll the Entire Spread: Close the current spread and open a new one at higher strikes to lock in gains and stay bullish.
• Convert to an Iron Condor or Iron Butterfly: Sell a put option or put spread to collect extra premium if the stock moves sideways.
• Exit Early: Close the position if the stock falls significantly or your bullish outlook changes.

How to Calculate Bull Call Spread?

A bull call spread is an options strategy used when an investor expects a moderate increase in the price of the underlying asset. The strategy is buying a call option at a lower strike price and selling a call option at a higher strike price. Both options must expire on the same date.

Steps to Calculate Bull Call Spread

• Identify the strike prices of the long call and short call.
• Calculate the net premium by subtracting the premium received from the premium paid.
• Find the maximum profit by subtracting the net premium from the difference between the strike prices.
• Calculate the maximum loss, which is equal to the net premium paid.
• Determine the breakeven point by adding the net premium to the lower strike price.

Formula:

The maximum profit and loss are determined by the difference between the two strike prices and the premiums paid and received.

1. Max Profit = Difference between strike prices – Net Premium Paid
2. Max Loss = Net Premium Paid before entering into the trade.
3. Breakeven Point = Lower Strike Price + Net Premium Paid

Example: Let's say a stock is trading at ₹250, and you expect it to rise to ₹270 by next month.

Step 1: Calculate Net Premium Paid

Formula: Net Premium Paid = Premium Paid − Premium Received

Calculation: = ₹12 − ₹5 

                        = ₹7

Step 2: Calculate Maximum Profit

Formula: Max Profit = Difference between Strike Prices − Net Premium Paid

Calculation: = (₹270 − ₹250) − ₹7
                        = ₹20 − ₹7
                          = ₹13

Step 3: Calculate Maximum Loss

Formula: Max Loss = Net Premium Paid

Calculation: = ₹7

Step 4: Calculate Breakeven Point

Formula: Breakeven Point = Lower Strike Price + Net Premium Paid

Calculation: = ₹250 + ₹7
                        = ₹257

Profit and Loss Scenarios for the above example

Scenarios for a Bull Call Spread

A Bull Call Spread is an options strategy used when you expect a stock to rise moderately. It helps reduce the cost of buying a call option while keeping both potential profit and loss limited. 

• Bullish Outlook: Stock is expected to rise steadily but not skyrocket.
• Earnings Plays: Anticipating a positive earnings report with controlled risk.
• Low Capital Commitment: When you want exposure to a high-priced stock without buying shares.
• Volatility on a Bull Call Spread: Volatility impacts this strategy significantly in both directions, such as,
• Rising Volatility: Benefits the bought call more than the sold call, potentially increasing the spread’s value.
• Falling Volatility: Hurts the position, as the net premium may lose value. Traders often enter Bull Call Spreads when implied volatility is low, as it reduces the cost of entry.

Impact of Time on a Bull Call Spread

Time decay (theta) affects a Bull Call Spread differently depending on where the stock price is relative to the strike prices.

• Stock Price Below Both Strike Prices (Out-of-the-Money): Time decay works against the strategy. As both call options lose time value, the spread gradually loses value if the stock fails to rise.
• Stock Price Between Both Strike Prices: Time decay has a relatively neutral to negative impact. The long call loses time value, while the short call also decays, partly offsetting the effect.
• Stock Price Above Both Strike Prices (In-the-Money): Time decay generally works in your favour. The short call loses its remaining time value faster, helping the spread move closer to its maximum profit by expiry.

Pros and Cons of a Bull Call Spread

A bull call spread offers a balanced approach to bullish trading by limiting both risk and reward. Understanding its advantages and drawbacks can help you decide whether it suits your market outlook.

Conclusion

The Bull Call Spread is a strategy for options traders who expect a stock or index to move up modestly. It reduces the cost of entering a bullish trade while holding both potential profit and loss pre-defined. The upside is limited, but the risk-reward profile of the strategy is attractive to traders wanting to participate in the bullish move of the market with controlled risk. 

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