Bull Call Spread Explained: Strategy, Profit & Loss, and Real Examples

Introduction

Trading is like driving a car—while the goal is to reach a profitable destination, effective risk management ensures you arrive safely. The bull call spread embodies this principle, offering a structured approach with controlled risk and defined profit potential.

Unlike outright naked call selling, which carries unlimited risk, or outright buying of options, where you risk losing your entire investment, a bull call spread provides a balanced, limited-risk strategy.

Key Takeaways 

• Bull Call Spread Basics: Understand what this options strategy is and how it works
• Ideal Market Scenarios: Learn when to use a Bull Call Spread 
• Trade Setup & Calculations: Know how to set up the trade and calculate profit/loss.
• Risk Management & Comparisons: Understand the risks, benefits, and differences from other strategies like Bull Put Spreads.

What is a Bull Call Spread?

A bull call spread is a two-legged options strategy that involves:

• Buying an at-the-money (ATM) call option (lower strike price)
• Selling an out-of-the-money (OTM) call option (higher strike price)

Both options must have the same expiration date and belong to the same underlying stock or index. This strategy is ideal when a trader expects a moderate increase in asset price.

Ideal Scenarios for a Bull Call Spread

• Scenario 1 – Positive Quarterly Results :A company is expected to report better quarterly earnings than last year. You anticipate the stock will rise, but you’re uncertain about how much. A bull call spread lets you profit from the expected increase with limited risk.
• Scenario 2 – Relief Rally from Support Levels: A stock has been declining and is nearing a strong support area, indicating a possible short-term rally. You’re cautiously optimistic but aware the stock could continue downward. A bull call spreads positions you to benefit  from a modest rally while limiting losses.
• Scenario 3 – Moderately Bullish on Breakout: A stock or index has broken through key resistance levels, signaling a potential upward move. You’re moderately bullish but cautious about a false breakout. Using a bull call spread allows you to capitalize on the rise while minimizing losses if the breakout fails.

The bull call spread is ideal for moderate bullish scenarios, offering a balance between risk and reward. In any situation where you’re uncertain or moderately bullish, using a bull call spread provides a clearly defined risk-reward ratio.

How Does a Bull Call Spread Strategy Work?

The bull call spread is a debit spread, meaning the cost of purchasing the ATM call is higher than the premium received from selling the OTM call.

Steps to Implement:

• Buy a call option at a lower strike price (ATM).
• Sell a call option at a higher strike price (OTM).
• Ensure both options have the same expiration date.

Key Calculations:

• Net Premium Paid = Premium Paid (ATM call) – Premium Received (OTM call)
• Maximum Loss = Net Premium Paid
• Maximum Profit = Difference in Strike Prices – Net Premium Paid
• Breakeven Point = Lower Strike Price + Net Premium Paid

Example of a Bull Call Spread

Suppose the Nifty 50 Index has recently broken a key resistance level of 22,000 and closed near 22,100, signaling a bullish breakout. According to technical analysis, the next strong resistance level is near 22,400, making it a likely price target.

Trade Setup:

• Current Nifty Price: 22,100
• Expiry Date: March 6, 2025
• Lot Size: 75

Outlook – Moderately Bullish

Strategy Setup

Net Premium Paid Per Lot = 190.80 – 55 = 135.80
Total Net Premium Paid = 135.80 × 75 = ₹10,185

Breakeven Point Calculation:

Breakeven = 22,100 + 135.8 = 22,235.8

Profit & Loss Scenarios:

Scenario 1: Market Closes at 21,900 (Below Long Call, Maximum Loss)

• 22,100 CE expires worthless: Loss = -190.80 (Premium Paid)
• 22,400 CE expires worthless: Profit = +55.00 (Premium Received)
• Net Loss: -135.80 points × 75 = ₹10,185 (Maximum Loss)

Scenario 2: Market Closes at 22,150 (Below Breakeven, Partial Loss)

• 22,100 CE intrinsic value: 22,150 – 22,100 = 50 points 
• Net result for 22,100 CE: 50 – 190.80 = -140.80 points.
• 22,400 CE expires worthless: Profit = +55 points 
• Net Loss: -85.80 points × 75 = ₹6,435

Scenario 3: Market Closes at 22,235.8 (Breakeven Point)

• 22,100 CE intrinsic value: 22,235.8 – 22,100 = 135.8 points 
• Loss from premium paid: 135.8 – 190.80 = -55 points
• 22,400 CE expires worthless: Profit = +55 points 
• Net P&L: 0 points × 75 = ₹0 (Breakeven)

Scenario 4: Market Closes at 22,400 (Above the Long Call, Maximum Profit)

• 22,100 CE intrinsic value: 22,400 – 22,100 = 300 points 
• Profit from premium paid: 300 – 190.80 = 109.2 points
• 22,400 CE expires worthless: Profit = +55 points
• Net Profit: 164.2 points × 75 = ₹12,315

Market Closes at 22,400 (At Short Call Strike, Maximum Profit Reached)

Scenario 5: Market Closes at 22,600 (Same Profit as 22,400)

• 22,100 CE intrinsic value: 22,600 – 22,100 = 500 points
• Profit from premium paid: 500 – 190.80 = 309.2 points
• 22,400 CE intrinsic value: 22,600 – 22,400 = 200 points
• Loss from premium received: 200 – 55 = -145 points
• Net Profit: 309.2 – 145 = 164.2 points × 75 = ₹12,315 (Capped Profit)

Market Closes at 22,600 (Profit remains capped at 22,400 strike due to the short call offsetting further gains.)

Summary of Profit & Loss Scenarios:

If Nifty closes above 22,400, the maximum profit remains ₹12,315, as further price increases are offset by the short call.

Advantages & Risks of a Bull Call Spread

Advantages:

• Risk is Limited and Defined – The maximum possible loss is restricted to the net premium paid, ensuring better risk management.
• Cost-Effective – Compared to purchasing a single call, a bull call spread lowers the premium outlay, making it a cost-efficient strategy.
• Flexibility in Selection – Traders can adjust the strike price selection to control the width of the spread and optimize risk exposure.

Risks:

• Limited Upside Potential – The maximum profit is capped at the difference between strike prices minus the premium paid, restricting returns in case of a strong rally.
• Time Decay Effect – Since the trade involves buying an option, time decay may erode the spread’s value if the price doesn’t move in the expected direction quickly.
• Liquidity Concerns – If the options involved in the spread have low liquidity, entering and exiting the trade could be challenging or lead to slippage.

Bull Call Spread vs. Bull Put Spread

While a bull call spread is a debit strategy that involves buying and selling call options, a bull put spread is a credit strategy that involves selling and buying put options. Both strategies are used when a trader expects a bullish move, but they differ in execution and risk-reward dynamics.

Key Differences Between Bull Call Spread and Bull Put Spread

Conclusion 

A bull call spread is a cost-effective strategy for traders expecting a moderate price increase. By structuring trades carefully and choosing appropriate strike prices, traders can limit risk while optimizing profit potential.