Bull Call Spread Introduction
Differences - Debit Spreads Versus Credit Spreads
Bull Call Spread Example
Example - Using the CallsAndPuts.com "Bull Call Spread" Data

Option Strategy:            
Bull Call Debit Spread (Vertical Bull Calls)

Investor Sentiment:       
Moderate Bullish Strategy (Small Debit Spread): It's considered a bullish strategy because you profit if the underlying stock price increases.

Profit Potential:             
This strategy requires the investor to buy an in-the-money call option and sell an out-of-the-money call option on the same stock with the same expiration date.  This is also known as a vertical bull call spread.  If the stock price closes above the out-of-the-money (higher) call option strike price on the expiration date, then the investor reaches maximum profits.
        
Risks:                              
If the stock price decreases below the in-the-money call (lower) option strike price at the expiration date, then the investor has a maximum loss potential of the net debit (premium received for selling the out-of-the-money (OTM) call premium minus the cost associated to purchase the in-the-money (ITM) call premium = Net Debit).

Drawbacks:                    
Lower risk than strictly buying call options, but limited profit potential.  Break-even at lower strike price plus net debit.  Maximum profit potential if stock rises above the out-of-the-money (higher) call option strike price.

Profit / Loss Summary:
Net Debit = Money received from selling out-of-the-money (OTM) call options - Money paid for buying in-the-money (ITM) call options
Maximum Profit Potential = Difference Between Strike Prices - Net Debit
Maximum Loss Potential = Net Debit  

Bull Call Spread Introduction

A Bull Call Spread is an effective method of hedging your option investments.  The Bull Call Spread strategy requires the investor to buy an in-the-money call options (long position) while simultaneously selling an out-of-the-money call option (short position) on the same underlying stock.  A Bull Call Spread strategy is profitable when the stock price moves above the break-even point: lower strike price plus net debit.  A characteristic of the vertical Bull Call Spread is the call options are sold and bought on the same underlying stock with the same expiration date (this is why it's known as a "vertical spread").  CallsAndPuts.com data focuses on Bull Call Spread plays that are vertical in nature.  The benefit of the Bull Call Spread strategy is the risk never exceeds the net investment of buying and selling call options simultaneously.  This strategy is considered moderately bullish because the investor is using the the sale of call options to reduce his/her risk while still positioning for a decent profit should the stock price move above the out-of-the-money (higher) call option strike price.  The loss potential is if the stock moves below the in-the-money (lower) call option strike price.  Because of the hedging involved by selling call options to offset the cost of the buy call premium, this method is less risky than strictly buying call options.

Differences - Debit Spreads versus Credit Spreads

As previously mentioned, a Bull Call Spread is the purchase of an in-the-money call option while simultaneously selling the out-of-the money call option on the same underlying stock. There are more aggressive and less aggressive Bull Call Spread positions, but CallsAndPuts.com "Bull Call Spread" data looks for plays where one call option position (leg) is in-the-money (lower) and the other leg is out-of-the-money (higher) in relation to the stock price.  Also, the data looks at Bull Call Spread call positions on the same underlying stock with the same option expiration dates.

There are two cash positions that can result from this transaction, positive or negative cash flow.  The premium received for the sale of an out-of-the-money (higher) call option is less than the cost to purchase an in-the-money (lower) call option: this spread is known as a "credit spread" (positive cash flow).  Conversely, buying an in-the-money (lower) call option costs more than the amount of money received from the sale of an out-of-the-money (higher) call option: this is considered a "debit spread" (negative cash flow).  A Bull Call Spread position is always considered a debit spread because an in-the-money (lower) call option purchase will always cost more than the premium received from the sale of an out-of-the-money (higher) call option.

Bull Call Spread Example

Let's go through a bull call spread example:

Stock Company Name/Ticker Symbol:        Sun Microsystems (SUNW)
Stock Price:                                                 $72.875
Bought the In-The-Money Call Option:             1 contract - July $70 @ $9.88
Sold Out-Of-The-Money Call Option:               1 contract - July $80 @ $5.125
Call Options Expiration Date:                          July (The market close of the third Friday of the month)

This position is considered a net debit of $4.75, spread of $10.  That is the difference between the purchase of the in-the-money (lower) call option and the sale of the out-of-the-money (higher) call option which results in a negative cash flow of $4.75 ($9.88 - $5.125).  The spread represents the difference between the in-the-money and out-of-the-money strike prices, which are $10 apart (July $80 call option - July $70 call option).  So, what does all of this translate to for potential profit?   Let's assume the stock price is higher than the out-of-the-money (higher) call option strike price ($80) on the July expiration date.  That would translate to a maximum profit of the difference between the spread and the net debit or $10 - $4.75 = $5.25 x 1 contract (100 shares) for a maximum profit of $525 per contract. 

Now let's look at the maximum loss potential should the stock price go below the lower strike price on the July expiration date.  When establishing our Bull Call Spread, we have pre-determined the maximum amount we are willing to lose in this option position.  That maximum loss potential translates to the $4.75 net debit x 1 contract (100 shares) = $475 per contract.

By using the Bull Call Spread strategy we have lowered our risk compared to only buying calls exclusively.  If we bought the July $70 @ $9.88 call option outright and the stock price is lower than $70 on the July expiration date, we would have a potential loss of $9.88 x 1 contract (100 shares) = $988 per contract.  This is a much more significant loss than the $475 potential loss using the Bull Call Spread strategy. 

To summarize:

Maximum Profit Potential = The Call Option Spread - Net Debit

Maximum Loss Potential = Net Debit  

Example - Using the CallsAndPuts.com "Bull Call Spread" Data

Now that we've explained the "Bull Call Spread" strategy, let's use the CallsAndPuts.com data to select a Bull Call Spread option play as an additional example: Bull Call Spread Example

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