What is a Bull Call Spread? Definition, Payoff, and Example
A bull call spread is a debit spread where a trader buys a call option and sells a higher-strike call option on the same underlying, capping both the maximum profit and the maximum loss.
What is a Bull Call Spread?
A bull call spread is an options strategy built from two call options on the same underlying stock with the same expiration date. The trader buys a call at a lower strike price and sells a call at a higher strike price. The strategy costs a net debit — the premium paid for the lower strike exceeds the premium received for the higher strike. The spread profits if the stock rises above the lower strike, with the maximum profit capped at the difference between the strikes minus the net debit.
How a Bull Call Spread is Calculated
The net debit is the cost of the long call minus the credit from the short call:
Net Debit = Premium of Lower Strike Call − Premium of Higher Strike Call
The maximum profit occurs when the stock closes at or above the higher strike price at expiration:
Maximum Profit = (Higher Strike − Lower Strike) × 100 − Net Debit
The maximum loss is the net debit paid:
Maximum Loss = Net Debit × 100
The breakeven price at expiration is:
Breakeven = Lower Strike + Net Debit
The payoff at expiration is:
Profit = Max(0, Stock Price − Lower Strike) − Max(0, Stock Price − Higher Strike) − Net Debit
Worked Example: AMD
AMD trades at $155.00. A trader expects the stock to rise over the next 30 days. The trader buys a $155 call for $4.50 and sells a $165 call for $1.50. The net debit is $3.00 per share, or $300 per contract.
Scenario 1: AMD closes at $170. The $155 call is worth $15. The $165 call is worth $5. The spread is worth $10. The profit is $10 − $3 = $7 per share, or $700. This is the maximum profit.
Scenario 2: AMD closes at $158. The $155 call is worth $3. The $165 call expires worthless. The spread is worth $3. The loss is $3 − $3 = $0 per share. This is the breakeven.
Scenario 3: AMD closes at $150. Both calls expire worthless. The trader loses the entire net debit of $3 per share, or $300. This is the maximum loss.
When Traders Use a Bull Call Spread
The bull call spread is a bullish directional trade with defined risk. The trader pays a limited debit and knows the maximum loss upfront. The trade profits from a rise in the stock price, but the profit is capped.
The strategy suits traders who expect a moderate move higher. The spread costs less than a naked long call because the short call offsets part of the premium. The trade also reduces the impact of time decay — the short call's theta partially offsets the long call's theta.
Traders use bull call spreads when implied volatility is high. Selling the higher-strike call captures some of the elevated premium, reducing the net cost of the position. The strategy also works well before earnings events where the trader expects a move up but wants to limit the cost of the trade.
Limitations and Common Misconceptions
The maximum profit is capped. A trader who expects a massive move upward — a 20% rally — will not capture the full move beyond the higher strike. The short call limits the upside.
The spread requires the stock to move above the lower strike plus the net debit just to break even. A small move up from entry does not guarantee a profit.
A common misconception is that a bull call spread is safer than a naked long call because the maximum loss is smaller. The loss is smaller in dollar terms, but the trade can still lose 100% of the capital invested. The risk-reward ratio is fixed and known at entry.
Another misconception is that early assignment on the short call is a problem. If the stock rises above the higher strike, the short call can be assigned early, especially if the option is deep in the money. The trader then holds a long call and a short stock position. Most brokers will exercise the long call to cover the assignment, which locks in the maximum profit early.