What is a bull spread?
A bull spread is an options tactic used when you expect the price of an asset to rise moderately. It is a vertical spread: you buy and sell options on the same underlying security with the same expiration date but with different strike prices. The convention for both common versions is to buy the option with the lower strike and sell the option with the higher strike.
Two main forms
– Bull call spread (debit call spread): uses call options. You pay more for the long call than you receive for the short call, so the trade opens with a net cash outflow (a debit).
– Bull put spread (credit put spread): uses put options. You receive more for the short put than you pay for the long put, so the trade opens with a net cash inflow (a credit).
Key mechanics (short)
– Same underlying and expiration for both legs.
– Lower-strike option is long (bought); higher-strike option is short (sold).
– Strike separation determines the maximum possible range of profit or loss.
– Cash flow at opening: bull call = net debit; bull put = net credit.
Payoff formulas and breakeven points
Notation:
– K1 = lower strike
– K2 = higher strike
– Pd = net premium paid (per share) for a bull call spread
– Pc = net premium received (per share) for a bull put spread
Bull call spread
– Net debit = Pd = premium paid for long call − premium received for short call.
– Maximum profit = (K2 − K1) − Pd.
– Maximum loss = Pd.
– Breakeven price at expiry = K1 + Pd.
Bull put spread
– Net credit = Pc = premium received for short put − premium paid for long put.
– Maximum profit = Pc.
– Maximum loss = (K2 − K1) − Pc.
– Breakeven price at expiry = K2 − Pc.
Worked numeric example (bull call spread)
Assume you expect the S&P 500 index to rise modestly. Current index level ≈ 4,402. You construct a two-month bull call spread:
– Buy one 4,400 call for $33.75
– Sell one 4,405 call for $30.50
Per‑share calculations (options on indexes typically have a multiplier; for many equity options multiplier = 100):
– Net debit per index point = 33.75 − 30.50 = 3.25
– Net cash outlay = 3.25 × 100 = $325
Outcomes at expiration:
– Maximum possible gain = (4,405 − 4,400) − 3.25 = 5 − 3.25 = 1.75 per point → 1.75 × 100 = $175
– Maximum possible loss = net debit = $325
– Breakeven index level = 4,400 + 3.25 = 4,403.25
Interpretation: you profit if the index is above 4,403.25 at expiry; gains stop once the index reaches 4,405.
When to use a bull call vs. a bull put
– Bull call spread: better when you want defined downside (limited loss equal to the net debit) and are willing to pay for a directional exposure. More aggressive in the sense it requires a larger move above the breakeven to be profitable.
– Bull put spread: used when you are moderately bullish to neutral and prefer to collect premium up front; it profits if the underlying stays above the breakeven. It exposes you to higher potential loss if the price falls sharply (but loss is capped).
Benefits and disadvantages (checklist style)
Benefits
– Limits downside risk (both spreads cap maximum loss).
– Reduces cost compared with buying a naked option (premium offset).
– Defines profit and loss in advance (useful for planning).
Disadvantages / risks
– Caps upside potential (profit is limited by strike separation).
– Can be assigned early (if short option is exercised before expiry), creating position/assignment risk.
– Requires accurate selection of strike spacing and expiration for a moderately rising market; large jumps can make returns suboptimal.
– Trading costs and margin requirements can reduce net returns.
Practical checklist before opening a bull spread
1. Confirm market outlook: moderately bullish, not expecting extreme jumps.
2. Choose expiration consistent with expected move timing.
3. Select strike spacing to balance max profit vs. cost (wider spacing → higher potential gain, usually higher cost).
4. Compute net premium (debit or credit), breakeven, max gain,
…breakeven, max gain, max loss using the formulas below. 5. Confirm option style and assignment risk: American-style options (most equity options) can be exercised before expiration — factor in early assignment risk, especially if short option is in-the-money near ex-dividend dates. 6. Check margin and capital: ensure your account meets margin/maintenance requirements and that the required capital is acceptable relative to potential return. 7. Plan exit rules: decide in advance whether you will (a) hold to expiration, (b) close the spread early at a target profit or loss, or (c) roll/adjust if the underlying moves strongly. 8. Use execution controls: prefer limit orders, watch for wide spreads in illiquid strikes, and size positions to limit single-trade exposure.
Key formulas (per 1 options contract = 100 shares)
– Net premium (debit if you pay more than you receive; credit if you receive more): Net premium = Premium paid (long option) − Premium received (short option).
– Breakeven at expiration (bull call spread): Breakeven = Long strike + Net premium (debit). For a bull put spread (credit): Breakeven = Short strike − Net premium (credit).
– Maximum gain (bull call): Max gain = Strike width − Net premium (if net premium is a debit). Expressed per contract: (Strike width − Net premium) × 100.
– Maximum loss (bull call): Max loss = Net premium paid × 100 (limited to premium for a debit spread).
– For a bull put (credit) spread: Max gain = Net premium received × 100; Max loss = (Strike width − Net premium) × 100.
Worked numeric examples
Example A — Bull call spread (debit)
– Buy 1 ABC May 50 call for $3.00 (pay $300).
– Sell 1 ABC May 55 call for $1.00 (receive $100).
– Net premium = 3.00 − 1.00 = $2.00 debit ($200 per contract).
– Breakeven = 50 + 2 = $52.00.
– Max gain = (55 − 50) − 2 = $3.00 → $300.
– Max loss = Net premium = $200.
Interpretation: If ABC finishes above $55 at expiration you earn $300; if it finishes below $50 you lose $200; the breakeven at $52 means you start making money beyond that price (ignoring commissions).
Example B — Bull put spread (credit)
– Sell 1 XYZ June 50 put for $3.00 (receive $300).
– Buy 1 XYZ June 45 put for $1.00 (pay $100).
– Net premium = 3.00 − 1.00 = $2.00 credit ($200 per contract).
– Breakeven = 50 − 2 = $48.00.
– Max gain = Net premium = $200.
– Max loss = (50 − 45) − 2 = $3.00 → $300.
Interpretation: You keep the $200 if XYZ stays above $50; if XYZ finishes below $45 you lose $300.
Greeks and behavior (what to monitor)
– Delta (directional exposure): Bull spreads have positive delta (profit as underlying rises). Magnitude depends on strike positions.
– Theta (time decay): For debit spreads (bull call), theta is typically negative — time decay works against you. For credit spreads (bull put), theta is typically positive — time decay works in your favor.
– Vega (volatility): Debit calls are hurt by falling implied volatility; credit put spreads benefit from falling volatility. The net vega depends on the two legs’ sensitivities.
– Gamma: Limited relative to single long options; sharp moves near strikes can change delta quickly.
Practical trade management checklist (pre- and post-trade)
– Pre-trade: verify liquidity (volume and open interest), confirm strike spacing aligns with risk appetite, set order type/limit, size position relative to account.
– Post-trade: monitor underlying price, implied volatility, and time-to-expiration daily; set alerts at breakeven and at target profit/loss levels.
– If trade moves against you: consider defined stop-loss, close the spread, or roll by extending expiration or adjusting strikes — quantify the new max loss before executing.
– If trade moves favorably: consider closing early to capture profit, especially if the remaining time value is small relative to remaining risk.
Assignment and early-exercise considerations
– Short option can be assigned anytime if American style and in-the-money. Early assignment risk is higher for short calls on dividend-paying stocks (an exercise to capture the dividend) and for short deep-in-the-money options near expiration.
– If assigned, you may be forced to buy/sell stock or take offsetting positions; have capital/margin ready or close the short leg ahead of likely assignment events.
Taxes and settlement notes
– Tax treatment of options varies by jurisdiction. In the U.S., options on individual equities generally produce short-term capital gains/losses unless held in ways that create different tax status; broad-based index contracts may be treated under Section 1256 rules (60/40). Record dates, wash-sale rules, and specific identification matter. Consult a tax professional and keep detailed trade records.
– Settlement differences (European vs American) affect exercise/assignment risk. Standard U.S. equity options are American-style.
When a bull spread is appropriate (summary checklist)
– You expect a moderate rise in the underlying, not a large gap move.
– You want defined risk and a known maximum loss.
– You prefer lower upfront cost than a long call (bull call) or want to collect premium while accepting limited downside (bull put).
– You accept limited upside in exchange for lower capital requirement.
Common mistakes to avoid
– Using strikes with poor liquidity (wide bid-ask spreads).
– Ignoring implied volatility changes — buying premium into high vol or selling into low vol without rationale.
– Failing to plan
for exits, assignment, and adjustments.
Managing and adjusting a bull spread
– Establish exit triggers before you enter. Decide profit targets (e.g., 50–75% of max possible gain), maximum acceptable loss, and time-based exits (e.g., close half the position X days before expiration).
– Monitor early-assignment risk. Short options on American-style equity options can be assigned any time they are in the money (ITM). Be especially careful around ex-dividend dates: holders of deep ITM short calls may exercise to capture dividends.
– Adjustment techniques (each has tradeoffs):
– Roll up/down: close the short leg and open another at a different strike or later expiration to extend or change the trade profile.
– Close a losing spread and reopen a new spread with wider strikes to enlarge potential reward (increases capital risk).
– Convert to an iron condor or calendar spread by adding legs—complex and increases commissions and execution risk.
– Avoid hasty leg-by-leg exits in illiquid strikes; wide bid-ask spreads can erode returns.
The Greeks and what to expect
– Delta: Bull spreads have positive delta (benefit from upward moves). The net delta is the long leg’s delta minus the short leg’s delta.
– Vega: If you are net long premium (bull call spread bought for a debit), you are net long vega and benefit from rising implied volatility (IV). If you sell a bull put spread for a credit, you are net short vega and lose if IV rises.
– Theta (time decay): Credit bull put spreads generally benefit from theta because the sold premium decays over time. Debit bull call spreads lose value to theta as expiration approaches.
– Gamma: Limited compared with single long options. Large, rapid moves can leave you with limited upside due to the short leg capping gains.
Worked numeric examples
1) Bull call spread (debit)
– Underlying XYZ current price: $50
– Buy 1 XYZ 50 call @ $3.00 (long leg)
– Sell 1 XYZ 55 call @ $1.00 (short leg)
– Net debit = $3.00 − $1.00 = $2.00 per share ($200 per standard contract)
– Maximum loss = net debit = $200
– Maximum gain = (higher strike − lower strike) − net debit = ($55 − $50) − $2.00 = $3.00 ($300)
– Breakeven at expiration = lower strike + net debit = $50 + $2.00 = $52.00
Interpretation: You need XYZ > $52 at expiration to be profitable. Your upside is capped at $55.
2) Bull put spread (credit)
– Underlying ABC current price: $100
– Sell 1 ABC 95 put @ $2.50 (short leg)
– Buy 1 ABC 90 put @ $1.00 (long leg)
– Net credit = $2.50 − $1.00 = $1.50 per share ($150 per contract)
– Maximum gain = net credit = $150
– Maximum loss = (short strike − long strike) − net credit = ($95 − $90) − $1.50 = $3.50 ($350)
– Breakeven at expiration = short strike − net credit = $95 − $1.50 = $93.50
Interpretation: You profit if ABC stays above $95 at expiration; largest loss occurs if it closes below $90.
Margin, capital, and settlement notes
– Bull call spreads bought for a debit require only the debit (cash outlay) plus commissions.
– Bull put spreads sold for a credit typically require margin or collateral equal to the maximum potential loss (strike width minus credit), though some brokers use reduced margin for defined-risk credit spreads.
– Short-leg assignment can convert an options position into a stock position or require cash settlement; ensure you have capital or a plan if assignment occurs.
– Confirm whether the options are American or European style; standard U.S. equity options are American, meaning early exercise is permitted.
Tax and recordkeeping considerations (high-level)
– Options can generate short-term capital gains or losses depending on holding period; special rules may apply for spreads and exercises. Keep detailed trade records: dates, strikes, premiums, commissions, assignment or exercise events, and whether you covered resulting stock positions.
– Consult a tax professional for specifics to your jurisdiction and circumstances.
Checklist before entering a bull spread
– Timeframe: expiration matches your expected timeframe for the underlying move.
– Market view: you expect a moderate rise, not a large gap move.
– Volatility: compare implied volatility to historical volatility; decide whether you want to buy or sell premium.
– Liquidity: choose strikes and expirations with tight bid-ask spreads and reasonable open interest.
– Risk limits: know max loss, max gain, breakeven, and position size relative to portfolio.
– Exit/adjustment plan: set profit targets, stop-loss levels, and rules for assignment or rolling.
Trade record template (minimum fields)
– Trade date, underlying ticker, option type (call/put), long/short, strike, expiration, premium, commissions, net debit/credit, rationale, exit date & price, realized P/L, notes on adjustments or assignment.
Pros and cons (summary)
– Pros: Defined risk, lower cost than uncovered long options, flexible payoff profiles, and potential for income (credit variants).
– Cons: Capped upside, sensitivity to IV and time decay depending on structure, assignment risk on short legs, and execution/slippage in illiquid strikes.
Final practical tips
– Start small and use paper trading to learn execution and adjustment mechanics.
– Prefer same-expiration spreads to avoid complex “diagonal” exposures unless you understand cross-expiration behavior.
– Watch dividends and ex-dates for early-exercise risk on short calls.
– Reassess implied volatility and position deltas as the market moves; don’t treat a spread as “set and forget.”
Educational disclaimer
This information is educational only and does not constitute personalized investment advice or
an endorsement to buy or sell any specific security or strategy. It is not tailored to your financial situation, investment objectives, tax circumstances, or risk tolerance. Consult a licensed financial planner, tax advisor, or broker-dealer before making investment decisions. Historical performance does not guarantee future results.
References and further reading
– Investopedia — Bull Spread (overview and examples): https://www.investopedia.com/terms/b/bullspread.asp
– Cboe (Chicago Board Options Exchange) — Bull Call Spread: https://www.cboe.com/strategies/options/bull-call-spread
– Options Industry Council (OIC) — Vertical Spreads (education on same-expiration spreads): https://www.optionseducation.org/toolsstrategies/strategies/vertical-spreads
– U.S. Securities and Exchange Commission (SEC) — Options: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_options
Educational disclaimer: This content is for educational purposes only and not investment advice. I am not your broker or financial advisor. Verify details with primary sources and professionals before acting.