Bull Call Spread

An option spread is the simultaneously buying and writing options. An option spread can reduce option expenses while still providing some level of price protection. One example of an option spread is referred to as the bull call spread.

A bull call spread involves simultaneously buying and selling different call options. Selling an out-of-the-money call option limits the amount you can gain if prices increase, but the premium you receive from the option sale reduces the net cost of the option you purchased. It might be used when the investor is bullish on a market up to a point. An attractive feature of the bull call spread is that once the strike prices are selected and the premiums are known, the user would know his maximum loss and net potential gain.

In this type of spread, an investor would buy a call option at a particular strike price and sell a call option at a higher strike. Typically, both options are traded in the same contract month. The maximum loss is limited to the difference between the cost of the call option bought and the call option sold plus commissions. The maximum gain is limited to the difference between the strike price of the call option bought and the strike price of the call option sold less commissions.