Construction

The strategy consists of the purchase of ITM, ATM or OTM calls and the simultaneous writing of OTM calls with higher strike price on the same underline security with the same expiration date.

It is a debit spread because the money we have to pay for the long call is more than the money we earn from the written call.

When to use

When we believe that the price of the underline will rise until a certain level and the implied volatility is relatively low. The bull call spread is a way to partially finance our long call position and that’s why we sell OTM calls. We accomplish the highest possible profit at expiration when the price of the underline is equal to or higher than the higher strike price.

Loss/Profit at expiration

Maximum loss: Limited to the net amount we paid for the spread + commissions.

Maximum gain: (Higher strike – lower strike) – net amount we paid for the spread – commissions.

Profit/Loss diagram

Below is the profit/loss diagram of the bull call spread strategy. The long call has a strike of $25 and premium $2 and the written call has a strike of $30 and premium $0.50.

Call bull spread strategy example

In the daily chart of ERF stock we have spotted an ascending triangle and the market (SPY) is also bullish. When the stock is at point A, we can buy an ITM call with strike $13 and expiration after three weeks. As long as we believe that the stock will not be much more above $17 in three weeks time due to the presence of a strong resistance at this level (line 2), we can write an OTM call with strike $17 which expires after three weeks and in that way finance the cost of the long call.

Of course in case we believe that the stock price will rise much more above $17 there is no point in implementing a bull call strategy because we will impose an upper limit in our profit potential.