A bull call spread is a vertical spread created by buying a call option (long call) at a lower strike price, and selling a call option (short call) at a higher strike price. Both the call options – long and short – must have the same expiration date. In example below, we are buying a $150 Strike Price call and selling a $170 Strike Price call. Both have the same expiration date of January 21, 2022, and the strike spread is $20 (i.e. $170 – $150).
Is Bull Call Spread a Net Debit or Net Credit spread?
A Bull Call Spread is a Net Debit spread.
Since we buy a lower strike call (which is more expensive) and sell a higher strike call (which is cheaper), on a net basis we pay money to create a bull call spread. In the example shown above, we can buy the $150 strike call for $9.40 per share (or $940 for the contract of 100 shares), and we can collect $3.60 per share (or $360 for the contract of 100 shares) for selling the $170 strike call.
On a net basis, we’ll have to pay $5.80 to create this bull call spread, hence it is a net debit spread.
Net debit = $5.80 per share, or $580 for the spread
What is the Maximum Profit in a Bull Call Spread?
The maximum profit in a bull call spread = Strike Spread – |Net Debit|
In this case, maximum profit = $20 – $5.80 = $14.20 per share, or $1,420 for the spread.
What is the Maximum Loss in a Bull Call Spread?
The maximum loss in a bull call spread = Net Debit
In this case, maximum loss = $5.80 per share, or $580 for the spread.
What is the Breakeven Point of a Bull Call Spread?
The breakeven point of a bull call spread = Lower Strike Price (i.e. of Long Call) + |Net Debit|
In this case, breakeven point = $150 + $5.80 = $155.80.
Bull Call Spread – Zones of Profit and Loss
Both the maximum profit and maximum loss are observed between the higher and lower strike prices of the bull call spread. The maximum profit is capped at the point when the stock price reaches the higher strike price. The maximum loss is contained at the point when the stock price falls to the lower strike price. There is one breakeven point and (mostly) it lies in between the two strike prices.
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