Bull Spreads

A bull spread is a strategy where you simultaneously buy a long call at Strike Price 1, and sell a call for Strike Price 2. Recall that users will pocket the premium should the option not be exercised. By selling a call with a higher strike price, users can reduce their total transaction costs and create a strategy that can generate a fixed income like in a bull spread.

What are its components?

A bull spread has two components:

  • Long call at strike price 1
  • Short call at strike price 2
  • (*A bull spread can also be created with puts)

When and why should I have a bull spread?

You should have a bull spread if you are moderately bullish on a stock and wish to enter a bullish position with protection. By having a long call, you will have a bullish position on a stock and have a protection should the stock decrease. This position entails that you will pay a premium, where the short option comes in play and reduces your costs. By doing this additional transaction, you are willing to reduce your gains for a lower transaction costs and a steady income stream once the stock performs at a price above strike price 2.

What is the payoff and profit graph?

What is the break-even point?

The break-even point of a bull spread can be defined by finding the stock price where the bull spread generates a zero-dollar profit. By adding both calls together and equating it to zero, you should solve for ST.

About Kevin Smith

Kevin is the content manager for Personal Finance Lab and is from Chicago, Illinois. He has a Master's Degree in Economics from Concordia University in Montreal, Canada. In addition to an economics background, he has also built training manuals to prepare finance companies for licensing requirements in mortgage loan origination and insurance sales.