Bull Call Spread: Meaning, How It Works, Example & Payoff
A bull call spread is an options strategy used when you expect a stock to rise moderately before a specific expiry date. The strategy combines two call options on the same stock and with the same expiry:
- You buy a call option at a lower strike price.
- You sell a call option at a higher strike price.
The call you buy allows you to benefit when the stock rises. The call you sell provides a premium that reduces the overall cost of the strategy.
However, selling the higher-strike call also limits your maximum profit. Therefore, a bull call spread offers limited risk and limited profit.
Key Takeaways
- A bull call spread is an options strategy that combines buying a call option at a lower strike price and selling another call option at a higher strike price with the same expiry to benefit from a moderate rise in the underlying stock.
- A bull call spread has limited maximum profit and limited maximum loss, making it a defined-risk options strategy.
- The maximum loss in a bull call spread is limited to the net premium paid, while the maximum profit is capped once the underlying reaches or exceeds the higher strike price.
- The break-even price of a bull call spread equals the lower strike price plus the net premium paid.
- Compared with buying a call option alone, a bull call spread reduces the upfront premium cost by selling a higher-strike call in exchange for limiting the maximum possible profit.
How Does a Bull Call Spread Work?
Suppose ABC Ltd. is trading at ₹100. Priya expects the stock to rise over the next month, but she does not expect it to move much beyond ₹120. She creates the following position:
| Position | Strike price | Premium per share |
| Buy call option | ₹100 | Pay ₹8 |
| Sell call option | ₹120 | Receive ₹3 |
Priya pays ₹8 per share to buy the ₹100 call. At the same time, she receives ₹3 per share by selling the ₹120 call.
Her net premium cost is therefore:
- Net Premium = Premium Paid - Premium Received
- Net Premium = ₹8 - ₹3 = ₹5 per share
Assume one options contract represents 5,000 shares. Priya’s total net premium is: ₹5 x 5,000 = ₹25,000
This ₹25,000 is the maximum amount she can lose from the strategy, excluding brokerage, taxes and other charges.
The lower ₹100 strike allows Priya to benefit if the stock rises. The higher ₹120 strike reduces her premium cost, but it also caps her profit once the stock reaches ₹120.
Why Do Traders Use a Bull Call Spread?
A trader may expect a stock to rise but find that buying a call option alone is expensive.
In Priya’s example, buying only the ₹100 call would cost ₹8 per share. By selling the ₹120 call for ₹3, she reduces her net cost to ₹5 per share. This lower premium also reduces the maximum possible loss.
However, the trader receives this benefit by giving up gains above ₹120. Even if ABC Ltd. rises to ₹130 or ₹150, Priya’s profit will remain capped. The main trade-off can be understood as follows:
| What the trader gets | What the trader gives up |
| Lower upfront premium | Gains above the higher strike |
| Defined maximum loss | Unlimited profit potential |
| Lower risk than buying the call alone | Full benefit from a sharp rally |
| Position suited to a moderate rise | Flexibility beyond the upper strike |
A bull call spread therefore suits a trader who has a moderately bullish view and a reasonable price target.
How Does the Strategy Perform at Different Stock Prices?
Priya’s result depends on where ABC Ltd. trades at expiry.
1. If the stock remains at or below ₹100
Suppose ABC Ltd. falls to ₹90 or remains at ₹100. The ₹100 call bought by Priya expires without value because the stock is not above its strike price. The ₹120 call sold by her also expires without value.
Priya loses the net premium of ₹5 per share, or ₹25,000 in total. This is the maximum possible loss. Even if the stock falls much further, Priya cannot lose more than the net premium paid.
2. If the stock rises above ₹100 but remains below ₹120
Suppose ABC Ltd. rises to ₹110. The ₹100 call is worth ₹10 per share because it allows Priya to buy at ₹100 when the stock is trading at ₹110. The ₹120 call expires without value because the stock remains below its strike price.
After deducting the ₹5 net premium, Priya earns ₹5 per share.
- Profit = (₹110 - ₹100 - ₹5) x 5,000
- Profit = ₹25,000
Priya’s profit continues increasing as the stock moves from ₹105 to ₹120.
3. If the stock reaches ₹120
At ₹120, the bought call is worth ₹20 per share. The call sold at ₹120 has no intrinsic value at exactly the strike price. After deducting the ₹5 net premium, Priya earns ₹15 per share.
- Maximum Profit = (₹120 - ₹100 - ₹5) x 5,000
- Maximum Profit = ₹75,000
This is the maximum profit from the strategy.
4. If the stock rises above ₹120
Suppose ABC Ltd. rises to ₹130. The ₹100 call bought by Priya is worth ₹30 per share. However, the ₹120 call sold by her creates a loss of ₹10 per share.
The combined value of the spread remains ₹20 per share: ₹30 gain on bought call - ₹10 loss on sold call = ₹20
After deducting the ₹5 net premium, the profit remains ₹15 per share, or ₹75,000 in total. Therefore, Priya earns the same maximum profit whether the stock finishes at ₹120, ₹130 or higher. The outcomes can be summarised as follows:
| Stock price at expiry | What happens? | Overall result |
| ₹90 | Both calls expire without value | Loss of ₹25,000 |
| ₹100 | Both calls expire without value | Loss of ₹25,000 |
| ₹105 | Bought call recovers net premium | Break-even |
| ₹110 | Bought call gains value | Profit of ₹25,000 |
| ₹120 | Maximum spread value is reached | Profit of ₹75,000 |
| ₹130 | Sold call offsets further gains | Profit remains ₹75,000 |
The payoff has three clear zones:
- At or below ₹100, the maximum loss is ₹25,000.
- Between ₹100 and ₹120, the result improves as the stock rises.
- At or above ₹120, the maximum profit remains ₹75,000.
How Are Maximum Profit, Maximum Loss and Break-Even Calculated?
The key calculations for Priya’s bull call spread are:
| Calculation | Formula | Priya’s example | Result |
| Net premium per share | Premium paid - Premium received | ₹8 - ₹3 | ₹5 |
| Maximum total loss | Net premium x quantity | ₹5 x 5,000 | ₹25,000 |
| Break-even price | Lower strike + net premium | ₹100 + ₹5 | ₹105 |
| Maximum profit per share | Higher strike - lower strike - net premium | ₹120 - ₹100 - ₹5 | ₹15 |
| Maximum total profit | Maximum profit per share x quantity | ₹15 x 5,000 | ₹75,000 |
The maximum loss is limited to the ₹25,000 net premium paid. This happens when ABC Ltd. finishes at or below ₹100.
The break-even price is ₹105. Priya starts making an overall profit only when the stock rises above this price, excluding charges.
The maximum profit is ₹75,000. It is reached when the stock is at or above the ₹120 higher strike at expiry.
What Are the Benefits and Risks of a Bull Call Spread?
- Lower upfront cost: Selling the ₹120 call reduces Priya’s net premium from ₹8 to ₹5 per share. This also lowers her maximum loss from ₹40,000 to ₹25,000.
- Defined profit and loss: Before entering the trade, Priya knows the maximum loss, break-even price and maximum possible profit.
- Profit is capped and time-bound: Gains are limited above ₹120, and the expected price rise must happen before expiry. A rise after expiry will not benefit the spread.
- Execution costs matter: The stock must move above the ₹105 break-even price, while poor liquidity, wider bid-ask spreads, brokerage and taxes can reduce the final return.
Bull Call Spread vs Buying a Call Option
Both strategies are used when a trader expects a stock to rise, but their cost and profit potential differ.
| Factor | Buying a call | Bull call spread |
| Upfront premium | Higher | Lower |
| Maximum loss | Full call premium | Net premium paid |
| Maximum profit | Unlimited in theory | Capped |
| Suitable market view | Strong bullish view | Moderate bullish view |
| Number of option positions | One | Two |
| Benefit from a sharp rise | Fully available | Limited above higher strike |
Buying a call may be more suitable when the trader expects a sharp rise and is willing to pay a higher premium.
A bull call spread may be more suitable when the trader expects a moderate rise and is willing to cap the potential profit in return for a lower cost.
When Can a Bull Call Spread Make Sense?
A bull call spread may make sense when:
- You expect the stock to rise moderately before expiry.
- Buying a standalone call appears expensive.
- You want to limit the maximum possible loss.
- You are comfortable capping gains above the higher strike price.
- Both option contracts are sufficiently liquid.
The strategy may not be suitable if you expect a sharp rally, are uncertain about the direction or believe the price move may happen only after expiry.
Bull Call Spread: Final Takeaway
A bull call spread is a limited-risk and limited-profit options strategy used when you expect a stock to rise moderately.
You buy a call at a lower strike and sell another call at a higher strike. The premium received from the higher-strike call reduces the cost of the lower-strike call.
In Priya’s example, she buys the ₹100 call and sells the ₹120 call. Her maximum loss is limited to the ₹25,000 net premium, while her maximum profit is capped at ₹75,000.
The strategy works best when the stock rises above the break-even price but does not need to move far beyond the higher strike.
The sensible way to create a bull call spread is to begin with your expected price range. Then choose strike prices and an expiry that match that view.