Bull Spread

Published Aug 3, 2023

Definition of Bull Spread

A bull spread is an options trading strategy that involves buying a call option and selling a higher strike call option on the same underlying asset. That means the investor is betting that the price of the underlying asset will increase. The goal of this strategy is to make a profit from the difference between the two options.

Example

To illustrate this, let’s look at an example. Assume an investor buys a call option with a strike price of $50 and sells a call option with a strike price of $60. The investor pays a premium of $2 for the $50 call option and receives a premium of $1 for the $60 call option. That means the investor has a net cost of $1.

Now, if the price of the underlying asset increases to $65, both options will be in the money. That means the investor can exercise the $50 call option and sell the $60 call option for a profit of $5. However, if the price of the underlying asset decreases to $45, both options will be out of the money. That means the investor will lose the entire premium of $1.

Why Bull Spread Matters

Bull spreads are a popular options trading strategy because they offer a limited risk and a potentially unlimited reward. That means the investor can make a profit even if the price of the underlying asset only increases slightly. On the other hand, the maximum loss is limited to the net cost of the spread. Thus, bull spreads are a great way to take advantage of a bullish market without taking on too much risk.