:: Profit & Loss

Profit

The profit on a Bull Call Spread is the difference between the strike prices less the premium.

Loss

The loss on the Spread is limited to the price of the premium paid.

Break Even

The break even point is the lower strike price plus the premium paid.

Bull Call Spread

The Bull Call Spread would be recommended where the expectation is for the share price to rise moderately. The strategy consists of buying an at-the-money call option and selling an out-of-the-money call option with a higher strike price.

:: Trading Condition

Stock	Intel
Price	$26.80
Outlook	More upside left after a lengthy rally before a correction occurs.

:: Alert Example

Action	Buy 10 Spreads
Buy	$25.00 Call (ATM)
Premium	$2.05
Sell	$30.00 Call (OTM)
Premium	$0.20

	Strike	Option		Debit/
	Price	Premium	x 100	Credit
Bought Option	$25.00	$2.05	$205.00	Dr
Sold Option	$30.00	$0.20	$20.00	Cr

	Cost per single spread		$185.00	Dr
	Cost per 10 spreads		$1,850.00	Dr

:: Maximum Profit

While the short $30 call reduces your risk compared to buying the $25 call outright, it also limits your profit - this is set at the difference between the strike prices less the cost of the spread times the number of spreads, which is $3,150:

	Strike
	Price	x 100
Sold Option	$30.00
Bought Option	$25.00
Difference Between Strikes	$5.00	$500.00

Cost per single spread		$185.00
Profit per single spread		$315.00
Profit per 10 spreads		$3,150.00

:: Profit Scenario

The profit from this trade can come either from buying back the spread or from allowing the options to expire (assuming, of course, that the market has moved in your favour). While the latter may be a consideration (particularly if the stock price is above the higher strike price) most advisors will trade out of a debit spread because they would prefer not to be exercised (as would happen if the short call expired in-the-money).

:: Consideration

In deciding whether to enter this strategy, you need to determine whether the cost of the spread is worth the reward - your brokerage will be double that paid when buying a call outright if you are charged for each leg on both entry and exit. For one spread at optionsXpress, for example, this would be 2 x $14.95 to enter and 2 x $14.95 to exit. If your trading profile only allows you to trade 1-2 spreads, this will be a significant consideration.