Bull Call Spread Strategy
A vertical spread combining a long call with a short call at a higher strike. Profit from moderately bullish moves with defined risk and lower capital requirements than buying calls outright.
Overview
The bull call spread (also called a "debit call spread" or "long call vertical") is a bullish options strategy that profits when the underlying rises moderately. You buy a call at a lower strike and sell a call at a higher strike, both with the same expiration.
This strategy is ideal when you are bullish but want to reduce cost compared to buying a naked call. The short call premium partially offsets the long call cost, lowering your breakeven and maximum loss. The tradeoff is capped profit potential—gains stop at the short call strike.
Bull call spreads are popular among traders who want defined risk with directional exposure. Research shows that most vertical spread traders prefer out-of-the-money strikes, resulting in lower net prices and transaction costs. The strategy benefits from rising stock prices and rising implied volatility (until the long call becomes deep ITM).
Key Insight
Bull Call Spread Payoff at Expiration
This diagram shows the profit/loss at expiration for different stock prices.Profit is capped between the two strikes.
Research
Research on vertical spreads, option spread design, and directional options strategies.
The Mathematics
In Plain English
The math behind this strategy is straightforward. Here's what you're actually doing:
- 1Buy 1 call option at strike K₁ (lower strike, typically ATM or slightly OTM)
- 2Sell 1 call option at strike K₂ (higher strike, OTM), same expiration
- 3Pay a net debit (D) = Long call premium - Short call premium
- 4At expiration, if stock is below K₁: both calls expire worthless, lose the debit
- 5At expiration, if stock is between K₁ and K₂: long call has value, profit increases
- 6At expiration, if stock is above K₂: max profit achieved, both calls exercised
That's it. The formulas below just express this process precisely.
1Profit at Expiration
Where S_T is stock price at expiration, K₁ is lower strike, K₂ is higher strike, D is net debit
2Breakeven Price
Stock must rise above lower strike by the net debit amount
3Maximum Profit
Width of spread minus net debit, achieved when stock ≥ K₂
4Maximum Loss
Limited to the net debit paid, occurs when stock ≤ K₁
5Risk/Reward Ratio
Amount risked per dollar of potential profit
Strategy Rules
Entry Rules
- 1Buy 1 call at strike K₁ (typically ATM or slightly OTM)
- 2Sell 1 call at strike K₂ > K₁ (same expiration)
- 3Choose spread width based on target price and risk tolerance
- 4Select expiration 30-60 days out for optimal theta/gamma balance
- 5Enter when moderately bullish on the underlying
Exit Rules
- 1Close at 50-75% of max profit to avoid gamma risk near expiration
- 2Close if thesis changes or underlying breaks support
- 3Let expire worthless if well below lower strike (minimize commissions)
- 4Consider rolling up if stock moves significantly higher mid-trade
- 5Close before earnings or major events if not part of thesis
Strike Selection
- Lower strike (K₁): ATM for higher delta, OTM for lower cost
- Higher strike (K₂): Near target price or resistance level
- Narrow spreads ($2-5 wide): Higher probability, lower reward
- Wide spreads ($10+ wide): Lower probability, higher reward
- Consider at least 0.30 delta on long call for meaningful exposure
Position Sizing
- Risk no more than 1-3% of portfolio per spread
- Account for full loss of net debit in position sizing
- Scale position size inversely with spread width
- Consider multiple smaller spreads vs. one large spread
Implementation Guide
The bull call spread is straightforward to implement but requires careful strike selection. The key decisions are choosing the spread width and strikes based on your price target and risk tolerance.
Identify Bullish Opportunity
Look for stocks with a moderately bullish technical or fundamental setup. Bull call spreads work best when you expect the stock to rise but not dramatically—if you expect a huge move, a long call might be better.
- Check for upcoming catalysts (earnings, product launches)
- Identify support/resistance levels for strike selection
- Ensure adequate option liquidity (tight bid-ask spreads)
Select Expiration
Choose an expiration that gives enough time for your thesis to play out. Too short and theta decay hurts you; too long and you pay for time value you may not need.
- 30-60 days is a common sweet spot
- Avoid holding through expiration (gamma risk)
- Consider weekly options for short-term trades
Choose Strikes
The lower strike determines your cost and breakeven. The higher strike determines your max profit potential. The spread width is the difference between strikes.
- Lower strike at or near current price for higher probability
- Upper strike at your realistic price target
- Wider spreads = higher risk/reward, lower probability
- Check that both strikes have good liquidity
Avoid very wide spreads on volatile stocks—the probability of reaching max profit may be too low.
Execute the Trade
Enter the spread as a single order (not two separate legs). Use a limit order at the mid-price or slightly above to get filled. Most brokers support spread orders natively.
- Enter as a "vertical spread" or "call debit spread" order
- Start with the mid-price, then adjust if not filled
- Verify the net debit matches your calculations
Manage the Position
Set profit and loss targets before entering. Consider closing early if you reach 50-75% of max profit, as the last portion of profit becomes increasingly difficult to capture.
- Take profits at 50-75% of max profit
- Cut losses if underlying breaks below key support
- Consider rolling up/out if very profitable early
- Monitor overall portfolio Greeks
Helpful Tools & Resources
Strategy Variations
Explore different ways to implement this strategy, each with its own trade-offs and benefits.
ATM Bull Call Spread
Buy ATM call, sell OTM call. Higher delta, higher cost, higher probability of profit. Best for strong conviction plays.
Higher probability but lower risk/reward ratio
OTM Bull Call Spread
Both strikes out of the money. Lower cost, lower probability, but higher potential return on capital. Good for speculative plays.
Lower probability but better risk/reward ratio
Poor Man's Covered Call
Buy a deep ITM LEAPS call instead of stock, then sell short-term OTM calls against it. Similar payoff to covered call with less capital.
Also called a diagonal spread or LEAPS covered call
Call Ratio Backspread
Sell 1 ATM call, buy 2 OTM calls. Credit or small debit entry with unlimited upside. Best for expected large moves.
Profits from volatility expansion and large moves
Risks & Limitations
Both options lose value over time, but the long call loses more than the short call gains. Time decay accelerates as expiration approaches, especially if the stock is near the lower strike.
Gains are capped at the short strike. If the stock rallies significantly past K₂, you miss out on additional profits that a long call would have captured.
The spread has positive vega when the stock is near the lower strike, but this decreases as the stock rises. A drop in IV can hurt the position early in the trade.
The short call can be assigned early, especially if the stock goes ex-dividend while the call is ITM. This creates an unexpected short stock position.
Wide bid-ask spreads can significantly impact entry and exit prices. Always check option volume and open interest before trading.
References
- Chaput, J.S. & Ederington, L.H. (2005). Vertical Spread Design. Journal of Derivatives, 12(3), 28-46 [Link]
- Chaput, J.S. & Ederington, L.H. (2003). Option Spread and Combination Trading. SSRN Working Paper [Link]
- Israelov, R. & Tummala, H. (2017). Which Index Options Should You Sell?. Journal of Investment Strategies, 6(4) [Link]
- Israelov, R. & Nielsen, L.N. (2015). Covered Calls Uncovered. Financial Analysts Journal, 71(6) [Link]
Options trading involves significant risk and is not appropriate for all investors. Spread strategies have limited profit potential and may not be suitable for all market conditions. Before trading options, read the Characteristics and Risks of Standardized Options document. Past performance does not guarantee future results.
Ready to explore more options strategies?
Learn covered calls, protective puts, spreads, and more advanced options strategies.
Browse Options Strategies