Bullish Option Strategies » Bull Call Spread

When your feeling on a stock is generally positive, bull spreads represent a nice low risk, low reward strategy.

The easiest way to create a bull spread is using call options at or near the current market price of the stock. If the underlying stock is trading at $26, you could buy a 25 call and sell a 30 call.

Example

With DELL Trading at $26.85, you might buy one JUL 25 call and sell one JUL 30 call. By selling the 30 call, you lower your exposure, but you also lower your upside potential. You would have paid $2.95 for the 25 call and sold the 30 call for $0.50. In this case, your total cost-and the most you could lose-would be $245 ($2.95 x 100 - $0.50 x 100).

To see how this works, consider the following:

Option purchase example
DELL trading @ $26.85
Buy 1 DELL JUL 25 Call @ $2.95 $295.00
Sell 1 DELL JUL 30 Call @ $0.50 ($50.00)
Cost of Trade $245.00

Your maximum profit is $255, the difference between the strike prices less the $245 you paid to put on the position. Even if the stock goes to 50, you still only stand to make $255 because while your 25 call is worth $25, the 30 call you sold is worth $20. To close the position, you would have to pay $20 for the 30 call when you sell the 25 call for $25. This limited upside is the price you pay for lowering your exposure (from $295 to $245) through the spread.

Bull Call Spread example graphic

If you like the idea behind the bull call spread, be sure to check out bull put spreads and bear put spreads. These can be comparable strategies depending on your objectives.