What Is a Bull Spread?

What Is a Bull Spread?

Let me explain what a bull spread is—it's an optimistic options strategy that you can use to profit from a moderate rise in the price of a security or asset. As a type of vertical spread, it involves buying and selling either call options or put options at the same time, with different strike prices but the same underlying asset and expiration date. No matter if it's puts or calls, you buy the option with the lower strike price and sell the one with the higher strike price.

If you're using calls, it's called a bull call spread, also known as a debit call spread because opening the trade creates a net debt in your account—the option you buy costs more than the one you sell.

Key Takeaways

You should know that a bull spread is an optimistic strategy for when you expect a moderate rise in the underlying asset's price. There are two main types: bull call spreads using calls and bull put spreads using puts. In both, you're buying and selling options on the same asset with the same expiration but different strikes. The maximum profit hits if the asset closes at or above the higher strike price.

Understanding a Bull Spread

If you opt for calls, it's a bull call spread; with puts, it's a bull put spread. The key difference is in cash flow timing—for the bull call, you pay upfront and aim for profit at expiration, while with the bull put, you collect money upfront and try to keep as much as possible by expiration.

Both approaches let you collect a premium from selling an option, which means your initial cash outlay is lower than just buying options outright.

How the Bull Call Spread Works

In a bull call spread, you're writing a call at a higher strike than the long call you're buying, which usually requires an initial cash payment. You sell a call with the same expiration and receive a premium that partially offsets the cost of the long call.

Your maximum profit is the difference between the strikes minus the net cost of the options, essentially the debit. The maximum loss is just the net premium you paid. Profit grows as the underlying price rises up to the short call's strike, then stays flat beyond that. If the price falls below the long call's strike, losses max out at the debit.

Important Note on Trading Volume

Keep in mind, the daily trading volume of all U.S. options markets was significant as of Dec. 22, 2023.

How the Bull Put Spread Works

A bull put spread is a credit put spread because it adds a net credit to your account when opened—the sold option brings in more than the bought one costs. You're writing a put at a higher strike than the one you buy, generating that initial credit.

Maximum profit is the credit received, which is the difference between the premiums of the sold and bought puts. Maximum loss is the strike difference minus that net credit.

Benefits and Disadvantages of Bull Spreads

Bull spreads aren't ideal for every situation; they perform best when the underlying asset is rising moderately without big jumps. For the bull call, losses are limited to the debit paid, but profits are capped at the short option's strike. With the bull put, profits are limited to the credit, and losses are capped at the strike difference minus the credit.

By buying and selling options on the same asset and expiration but different strikes, you cut the cost of entering the trade compared to just writing options.

Calculating Bull Spread Profits and Losses

For both strategies, max profit occurs if the asset closes at or above the higher strike, and max loss if at or below the lower strike. Breakeven for a bull call is the lower strike plus net premium paid, before commissions. For a bull put, it's the upper strike minus net premium received, before commissions.

Example of a Bull Spread

Suppose you're moderately optimistic on the S&P 500 Index at 4402. You buy a two-month SPX 4400 call for $33.75 and sell a two-month SPX 4405 call for $30.50. Net debit is $2.75 times 100, or $275.

You're betting the SPX rises above the breakeven of 4402.75 by expiration. Max profit is $5 (strike difference) minus $2.75, or $2.25 times 100 = $225, no matter how high it goes. Max loss is the $275 paid if it drops low. You can sell early to lock in gains or cut losses.

What Is the Difference Between a Bull Spread and a Bear Spread?

A bull spread predicts a price increase, profiting if the security closes at or above the target, with limited losses if it falls. A bear spread does the opposite, betting on a decline.

What Is the Most Aggressive Type of Bull Spread?

The most aggressive bull call spreads use out-of-the-money calls for both legs, as they're cheaper but riskier than in-the-money ones.

Is a Bull Call Spread a Good Strategy?

Yes, if executed well, it offers reliable profits with reduced loss exposure, but it's best for moderate upward trends. In volatile jumps, you might miss bigger gains.

The Bottom Line

In summary, a bull spread lets you bet on security price growth by buying a call at one strike and selling another at a higher strike with the same expiration. Profit if it closes above the higher strike; losses limited to the net option cost if not.