If you believe a stock price is going to go up, but in a limited capacity, you might be moderately bullish. If you’re amenable to capping your gains by mitigating your risk, you might think about opening a bull call spread. This options strategy is one that many, many traders use because it lends itself to diverse time horizons and tactics. So long as you’re bullish and willing to define your risk, this strategy is easy enough to execute. 

The bull call spread is also a beginner options strategy, and requires just two positions to establish. It’s a great approach to capitalizing on appreciation in times of volatility, as well as in a generally bullish market. 

Here’s a closer look at bull call spreads: how to set them up, how they define risk and some of the nuanced factors investors need to keep in mind as they execute this bullish options strategy. 

How to Set Up a Bull Call Spread

Setting up a bull call spread involves two call options: buying one and selling one. Both options have the same expiratory date and, once established, the two call options set a range. Traders buy a call option for a strike price that’s above the current market value; then, they sell another call option for a strike price above that. This is a debit spread, and the cost of setup is the net difference between the two call options. Here’s a look at an example of a bull call spread:

ABC Company is currently trading for $45. Trader Mike buys a $50 call option for $2 and sells a $55 call option for $1; both expire in 30 days. This setup represents a bull call spread, since the two call options set a range. 

As options expire in or out of the money based on the price of the underlying stock, several scenarios are possible:

• If the price of the security doesn’t reach the lower strike price, the option expires worthless and the investor loses the premium used to establish the spread.
• When the price of the security trades above the lower strike price but below the higher strike price, the investor exercises the first option for a profit. 
• If the price of the security trades above the higher strike price, the second call option will also exercise, capping the gains at the difference between the two options. 

Investors can choose their time horizon and price points; however, the two calls need to follow the same exercise schedule for the spread to be effective. Investors also need to identify the break-even point of the strategy based on potential profits and the cost paid to set up the spread. 

Bull Call Spreads Mitigate Risk, Cap Reward

The appeal of a bull call spread is the known risk-reward relationship that’s created by the strike prices. Below the lower strike, the loss is just the cost of the setup. However, because of the sold call at the higher strike price, gains are capped. Investors will always profit so long as the option is in the money; yet once it exceeds the high end of the options range, there’s no more opportunity for gains. 

By capping risk and reward, investors put themselves in a position to speculate in a bullish capacity. This is often why investors will stagger bull call spreads as they identify different support and resistance levels in an emerging trend. They only risk losing the setup cost, and can establish more conservative or aggressive spreads depending on trend strength. 

When to Set Up a Bull Call Spread

Bull call spreads are best-deployed in bullish markets and within bullish patterns. These options strategies depend on the future appreciation of a security. Yet, they work best when that appreciation is incremental. Investors typically rely on these strategies if they believe the price of a security will reach new support levels. These spreads are also useful in volatile markets, but they’re only effective on price upswings and bullish trends. 

The Pros and Cons of Bull Call Spreads

As a basic options strategy, the pros and cons of bull call spreads have very clear pros and cons. Typically, they’re very easy for new traders to understand. Here’s a look at what to expect from this well-defined options strategy:

Pros

• Investors know their risk and have capped losses (the price of the setup)
• Bull call spreads are often cheaper than individual calls
• Maximum reward is also known and defined upfront

Cons

• Investors face capped maximum gains (higher call strike price)
• This options strategy is a net debit spread that has a setup cost

Among options strategies, the bull call spread is relatively safe. However, with the mitigated risk that comes with this strategy, there’s also capped reward. Investors comfortable with defining their potential gains will find bull call spreads useful as they speculate on future price appreciation.

The Bottom Line on Bull Call Spreads

Bull call spreads are extremely simple to set up and great for investors who want to utilize options to create risk-mitigated gains. While these spreads are speculative about future price increases, they’re nonetheless safer than more complicated vertical options spreads. The downside? Capping risk also caps reward.

A bull call spread is a great foray into options for many investors, especially in a bull market when price appreciation is all but certain. Practice setting up these options to gain familiarity with bullish options strategies, without burdening a significant amount of risk while you learn.