In this article, we’re going to break down the bull call spread (also referred to as a “long call spread”), which allows modestly optimistic traders to profit from a stock’s upward trajectory for less than the cost of buying a lone call.

Who should tune in? The bull call spread is usually employed by traders expecting the underlying stock to power moderately higher in the short-to-intermediate term. One of the primary appeals of this strategy is that it’s typically relatively cheap to employ, compared to buying a single call or purchasing shares of the stock outright. However, the “discount” comes at a price, as the spread strategist must compromise his or her maximum profit potential in the event of a significant rally.

How does it work? To implement this simple option play, the investor would purchase an in-the-money call on a stock with seemingly bullish prospects. However, to help offset the cost of the purchased call, the trader would simultaneously sell a cheaper, higher-strike call with the same expiration date. Though the play will still be established for a net debit, the investor’s bottom line – and maximum risk – will be less than if he or she didn’t write the correlating call.

What’s in it for me? The best-case scenario for the bull call spread is for the underlying security to finish right at or slightly north of the sold call strike at options expiration – but not so far that the trader kicks himself for not simply buying a lone call or purchasing the stock outright.

In any case, the maximum reward for the strategy is limited to the difference between the call strikes, less the initial premium paid. (In comparison, the profit potential for a long call or garden-variety stock position is theoretically unlimited, as there’s technically no limit to how high a stock can rally.)

What do I have to lose? As with any bullishly biased trade, the worst-case scenario for the bull call spread is for the underlying equity to gravitate lower ahead of options expiration. However, no matter how deep the stock retreats into the red, the good news is that the strategist’s maximum risk is limited to the net debit incurred at initiation.

To avoid forfeiting the initial premium paid, the investor needs the underlying shares to finish above breakeven, which is calculated by adding the net debit to the bought call strike.

(Don’t forget to include any brokerage fees, margin requirements or commission costs.)

In conclusion

A bull call spread can be a great alternative to buying a call or shares of a stock outright, since the premium from the written call helps to lower the cost and the overall risk of the position. However, with limited risk comes limited reward. If the underlying security skyrockets significantly past the spread strategists’ expectations, the trader could end up regretting not rolling the dice on a more aggressive strategy.