The bull call spread is one of the most commonly used options trading strategies there is. It's relatively simple, requiring just two transactions to implement, and perfectly suitable for beginners. It's primarily used when the outlook is bullish, and the expectation is that an asset will increase a fair amount in price. It's often considered a cheaper alternative to the long callbecause it involves writing calls to offset some of the cost of buying calls.

The trade-off with doing this is that the potential profits are capped. On this page, we provide further details on this strategy, specifically covering the following. The main reason why you would use this spread is to try and profit from an asset increasing in price.

You would typically use it when you expected the price of an asset to increase significantly, but not dramatically as the profit potential is limited. The strategy is basically designed to reduce the upfront costs of buying calls so that less capital investment is required, and it can also reduce the effect of time decay. There are two simultaneous transactions required.

You would use the buy to open order to buy at the money calls based on the relevant underlying security, and then write an equal number of out of the money calls using the sell to open order. This results in a debit spread, as you spend more than you receive. The basic idea of writing the calls in addition to buying them is to reduce the overall costs of the position.

The big decision you have to make when putting this spread on is what strike price to use for the out of the money contracts you need to write. The higher the strike price, the more potential profits you can make but the less money you receive to offset the costs of buying at the money calls. As a general rule of thumb, you should write the contracts with a strike price roughly equal to where you expect the price of the underlying security to move to.

This spread can make profits in two ways. First, if the underlying security increases in price, then you will make profits on the options that you own.

Second, you will profit from the effect of time decay on the out of the money options that you have written. The ideal scenario is that the price of the underlying security goes up to around the strike price of the written options contracts, because this is where the maximum profit is. If the underlying security continues to go up in price beyond that point, then the written contracts will move into a losing position.

Although this won't cost you anything, bee causthe options you own will continue to increase in price at the same rate. The spread will lose money if the underlying security doesn't increase in price. Although you will profit from the short position, as the contracts you have written will expire worthless, the options you own will also expire worthless.

The potential losses are limited though, because you cannot lose any more than the cost of putting the spread on. The biggest advantage of using the bull call spread is that you basically reduce the cost of entering a long call position because of also entering a short call position.

Although you limit your potential profits by doing this, you can control how much you stand to make by choosing the make money with advocare price of the contracts you write accordingly.

This means you have the chance genuine online money making sites without investment make a bigger return on your investment than you would by simply forex trading signals online forex signal signalfx64 calls, and also have reduced losses if the underlying security falls in value.

This is a simple strategy, which appeals to many traders, and you know exactly how much you stand to lose at the point of putting the spread on.

The disadvantages of are limited, which bull call option spread perhaps why it's such a popular strategy. There are more commissions to pay than if you were simply buying calls, but the benefits mentioned above should more than offset that minor downside.

The only other real disadvantage is that your profits are limited and if the price of the underlying security rises beyond the strike price of the short call options you won't make further gains.

We have provided an example below to give you an idea of how this strategy works in practice.

Bull spread - Wikipedia

Please be aware that this example is purely for the purposes of illustrating the strategy and doesn't contain precise prices and it doesn't take commission costs into account.

The ones you wrote in Leg B will be at the money and worthless. The ones you wrote in Leg B will be out of the money and worthless. The options in Leg A and Leg B will expire worthless. You can close your position at any time prior to expiration if you want to take your profits at a particular point, or cut your losses. Remember, you can increase the profit potential of the spread by writing the options in Leg B with a higher strike price.

As you can see, the bull call spread is a simple strategy that offers a number of advantages with very little in the way of disadvantages.

Options Strategy: The bull call spread

It's a very good strategy to use when your outlook is bullish and you believe you can be relatively accurate in predicting how high the price of the underlying security will rise. Although your profits are limited if the price of the underlying security does rise higher than you expected, you reduce your costs at the outset and therefore improve your potential return on investment and further limit the amount you can lose.

Home Glossary of Terms History of Options Trading Introduction to Options Trading Definition of a Contract What is Options Trading? Bull Call Spread The bull call spread is one of the most commonly used options trading strategies there is.

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Bull spread - Wikipedia

Reasons for Using The main reason why you would use this spread is to try and profit from an asset increasing in price. How to Put On a Bull Call Spread There are two simultaneous transactions required. Advantages The biggest advantage of using the bull call spread is that you basically reduce the cost of entering a long call position because of also entering a short call position.

Disadvantages The disadvantages of are limited, which is perhaps why it's such a popular strategy. Example We have provided an example below to give you an idea of how this strategy works in practice. This is Leg A.

This is Leg B. Read Review Visit Broker.