Bull Call Spread Strategy
What is a Bull Call Spread?
A bull call spread involves buying a call option at a lower strike price and selling a call option at a higher strike price. This strategy:
- Has defined maximum risk and reward
- Costs less than buying a single call option
- Profits when the stock rises above the lower strike
- Maximum profit is capped at the higher strike
Example
On Lloyds Bank trading at £0.45/share, you create a bull call spread:
- Buy call at £0.45 strike for £0.03 premium
- Sell call at £0.50 strike for £0.01 premium
- Net cost: £0.02/share
- Maximum profit: £0.03/share (£0.05 spread - £0.02 cost)
If Lloyds rises above £0.50, you make the maximum profit. If it stays below £0.45, you lose the net premium paid.
When to Use
- Moderately bullish on a stock
- Want to limit risk compared to buying calls
- Expect stock to rise but not dramatically
- Want to reduce the impact of time decay
Risks
- Maximum loss is limited to net premium paid
- Maximum profit is capped at the spread width minus cost
- Early assignment possible on short call
- Requires margin for the spread
Important: This strategy involves risk and may not be suitable for all investors. Always consider your financial situation and risk tolerance before trading.