What Is a Bull Call Spread?
A Bull Call Spread is an options strategy used when you are moderately bullish on a stock or index. It involves buying a lower strike call and selling a higher strike call of the same expiry.
This reduces the cost compared to buying a naked call, but it also caps the maximum profit.
š¹ Market View
- You expect the stock or index to rise moderately.
- You do not expect a big rally beyond a certain level.
š¹ Example
- Underlying: Nifty trading at 19,800
- View: Expect a rise, but not beyond 20,200
- Strategy: Bull Call Spread (monthly expiry)
- Buy 19,800 CE at ā¹150 premium
- Sell 20,200 CE at ā¹50 premium
š¹ Net Cost
- Premium Paid = ā¹150 (buy option)
- Premium Received = ā¹50 (sell option)
- Net Cost = ā¹100 (per lot Ć lot size)
This ā¹100 is your maximum risk.
š¹ Profit & Loss Scenarios
- If Nifty expires below 19,800
- Both options expire worthless.
- Loss = ā¹100 (Max Loss).
- If Nifty expires at 20,000
- 19,800 CE = ā¹200 intrinsic value.
- 20,200 CE = worthless.
- Net payoff = ā¹200 ā ā¹100 cost = ā¹100 profit.
- If Nifty expires at or above 20,200
- 19,800 CE = ā¹400 intrinsic value.
- 20,200 CE = exercised ā payoff given away (ā¹400 ā ā¹200 difference).
- Net payoff = ā¹400 ā ā¹200 = ā¹200.
- Minus cost (ā¹100) = ā¹100 profit.
š¹ Strategy Summary
- Max Loss = Net premium paid = ā¹100
- Max Profit = Difference in strikes ā Net premium
= (20,200 ā 19,800) ā 100
= 400 ā 100 = ā¹300 per lot - Breakeven = Lower strike + Net premium
= 19,800 + 100 = 19,900
š¹ When to Use?
- When you expect a moderate rise, not a strong rally.
- Works best in stable to slightly bullish markets.
- Safer than buying a naked call because risk is capped