Call Spreads (Vertical)
Now that you understand spread classification, let's apply it to the two vertical call spread strategies: the bull call spread and the bear call spread.
Bull Call Spread (Debit Call Spread)
- Structure: Buy a call at a lower strike price + sell a call at a higher strike price (same expiration)
- Net effect: Debit; the lower-strike call costs more than the higher-strike call pays
- Market outlook: Moderately bullish; expects the stock to rise, but not dramatically
- The investor caps the upside in exchange for reducing the cost of the long call
| Component | Formula |
|---|---|
| Max gain | (High strike - Low strike) - Net debit |
| Max loss | Net debit paid |
| Breakeven | Low strike + Net debit |
Example: Buy 1 XYZ Oct 50 call at 5 / Sell 1 XYZ Oct 60 call at 2
- Net debit = $5 - $2 = $3
- Max gain = ($60 - $50) - $3 = $7 (stock at or above $60)
- Max loss = $3 (stock at or below $50)
- Breakeven = $50 + $3 = $53
When max gain occurs: Both options are exercised; the investor buys at $50 and sells at $60, netting $10 minus the $3 debit
When max loss occurs: Both options expire worthless; the stock stays at or below the lower strike
Think of it this way: A bull call spread is like buying a call option "on sale." You give up unlimited upside by selling a higher-strike call, but that sale offsets part of your cost. Your worst case is the reduced premium you paid (the net debit), not the full price of the long call.
Exam Tip: Gotchas
- A bull call spread is a DEBIT strategy. You pay money upfront (buy the more expensive call, sell the cheaper one). If both options expire worthless, you lose the net debit.
- Max gain is capped. Even if the stock skyrockets past the higher strike, your profit stops at the spread width minus the debit.
Bear Call Spread (Credit Call Spread)
- Structure: Sell a call at a lower strike price + buy a call at a higher strike price (same expiration)
- Net effect: Credit; the lower-strike call sold brings in more premium than the higher-strike call costs
- Market outlook: Moderately bearish; expects the stock to stay flat or decline
- The investor collects premium upfront and profits if the stock does not rise significantly
| Component | Formula |
|---|---|
| Max gain | Net credit received |
| Max loss | (High strike - Low strike) - Net credit |
| Breakeven | Low strike + Net credit |
Example: Sell 1 XYZ Oct 50 call at 5 / Buy 1 XYZ Oct 60 call at 2
- Net credit = $5 - $2 = $3
- Max gain = $3 (stock at or below $50)
- Max loss = ($60 - $50) - $3 = $7 (stock at or above $60)
- Breakeven = $50 + $3 = $53
When max gain occurs: Both options expire worthless; the stock stays at or below the lower strike
When max loss occurs: Both options are exercised; the investor sells at $50 and buys at $60, losing $10 minus the $3 credit
Think of it this way: A bear call spread is the opposite side of the bull call spread. You collect money upfront (the credit) and hope the stock stays flat or drops so both options expire worthless and you keep the premium. Your risk is that the stock rises and you get assigned on the short call.
Exam Tip: Gotchas
- A bear call spread is a CREDIT strategy. You receive money upfront (sell the more expensive call, buy the cheaper one). If both options expire worthless, you keep the full credit.
- The bull call spread and bear call spread with the same strikes share the same breakeven. Breakeven for any vertical call spread is the lower strike + net premium. The difference is which side profits above vs. below that point. In both examples above, the breakeven is $53.
- Debit spreads want movement; credit spreads want stillness. The bull call spread profits when the stock rises past the breakeven. The bear call spread profits when the stock stays below the breakeven.