What is Bull Call Spread? How to Use Options Trading Strategy for Stocks and Indices

Strategy notes

The Bull Call Spread stands amongst the most utilised approaches when market analysis suggests moderate upward momentum in a particular stock or index. This two-legged structure typically employs at-the-money and out-of-the-money options, though flexibility exists for alternative strike selections based on specific circumstances.

Implementation requires two simultaneous transactions:

Purchase one at-the-money call option as the first component

Sell one out-of-the-money call option as the second component

Critical parameters govern proper execution. All strike prices must reference the same underlying security, whether stock or index. Both positions must share identical expiry dates. Each leg involves equal quantities of contracts, ensuring balanced positioning.

Practical Application Example

Market outlook suggests moderate upward movement, though approaching expiry may constrain gains. Consider the Nifty Index trading at 18,425 points. Available options include the 18,400 call (at-the-money) priced at Rs 142, and the 18,600 call (out-of-the-money) priced at Rs 48.

The trade structure proceeds as follows:

Acquire the 18,400 call by paying Rs 142 premium, representing a debit transaction as capital flows outward. Simultaneously, sell the 18,600 call, collecting Rs 48 premium as a credit transaction where capital flows inward. The net cash movement equals Rs 94, calculated as the difference between outlay and receipt (142 minus 48).

This net debit characterises all Bull Call Spreads, distinguishing them as debit strategies within the broader family of spread approaches. For equity investment purposes, understanding this cash flow dynamic proves essential when evaluating capital requirements across multiple positions.

Analysing Potential Outcomes

Markets move unpredictably, potentially settling at any level upon expiry. Examining various scenarios illuminates how the strategy performs across different price points.

Should the Nifty close at 18,250 below the lower strike both options expire worthless. Call option value at expiration derives from intrinsic value, calculated as the maximum of either zero or the difference between spot price and strike price.

For the 18,400 call, intrinsic value equals zero when spot trades at 18,250, resulting in complete loss of the Rs 142 premium paid. However, the 18,600 call also holds zero intrinsic value, allowing retention of the Rs 48 premium collected. Net outcome shows a Rs 94 loss, matching the strategy’s initial net debit.

Should the index expire precisely at 18,400 the lower strike both options again carry no intrinsic value. The mathematics yields identical results: a Rs 94 net loss represents the worst-case scenario regardless of how far prices decline.

Consider expiry at 18,600, the higher strike price. The 18,400 call now possesses Rs 200 intrinsic value (18,600 minus 18,400). Having purchased this option for Rs 142, the gross profit reaches Rs 58. Meanwhile, the 18,600 call expires worthless, preserving the Rs 48 premium collected. Combined profit totals Rs 106.

When the market closes at 18,750 exceeding the higher strike both options carry intrinsic value. The 18,400 call holds Rs 350 intrinsic value, generating Rs 208 profit after deducting the Rs 142 premium paid. Conversely, the 18,600 call sold now bears Rs 150 intrinsic value, creating a Rs 102 loss after accounting for the Rs 48 premium received. Net profit again equals Rs 106.

Examining outcomes across the complete price spectrum reveals consistent patterns. Losses never exceed Rs 94 regardless of downward movement severity. Conversely, profits cap at Rs 106 regardless of substantial upward momentum. This defined risk-reward profile characterises the strategy’s fundamental nature.

Calculating Maximum Parameters

Two crucial values determine the strategy’s boundaries. Maximum loss equals the net debit paid, calculated as premium paid for the lower strike minus premium received for the higher strike. In this example, Rs 94 represents both initial outlay and maximum potential loss.

Maximum profit derives from the spread between strikes minus the net debit. Spread refers to the distance between the two strike prices here, Rs 200 separating 18,400 and 18,600. Subtracting the Rs 94 net debit yields Rs 106 maximum profit.

These calculations apply universally across Bull Call Spreads, enabling traders using a stock screener or receiving trading calls to rapidly assess whether proposed opportunities offer acceptable risk-reward ratios.

The Breakeven Threshold

Profitability commences when the underlying security exceeds a specific threshold. This breakeven point equals the lower strike plus net debit. Using the example figures, adding Rs 94 to the 18,400 strike produces a breakeven level of 18,494.

Below 18,494, the strategy incurs losses, albeit capped at Rs 94. At precisely 18,494, the position breaks even, generating neither profit nor loss. Above 18,494, profits materialise, reaching maximum Rs 106 once prices exceed 18,600.

Visualising the Payoff Structure

The strategy’s payoff diagram illustrates three distinct zones. When prices settle beneath the lower strike, flat losses equal the net debit. As prices rise through the breakeven point, profits increase linearly until reaching the higher strike. Beyond the higher strike, profits plateau at maximum levels regardless of further price appreciation.

This creates a distinctive profile: limited downside protection combined with capped upside participation. The trade-off proves acceptable when outlook suggests moderate movement rather than dramatic appreciation.

Strategic Rationale

Why employ a Bull Call Spread rather than simply purchasing a call option? Cost efficiency provides the primary justification.

A moderately bullish perspective might justify purchasing the at-the-money 18,400 call for Rs 142. However, incorrect analysis results in complete Rs 142 loss. The Bull Call Spread reduces exposure to Rs 94 a meaningful 34 percent reduction by simultaneously selling the higher strike option.

This premium reduction comes at the expense of capped profits. Yet when conviction suggests modest gains rather than explosive movement, surrendering unlimited upside in exchange for reduced cost and defined risk represents prudent capital management.

For those working with a financial advisor or independently managing equity investment portfolios, this cost-benefit calculus frequently favours spreads over outright positions. Capital preserved through reduced premiums becomes available for diversification across additional opportunities identified through systematic stock market analysis or recommendations from trading calls.

The Bull Call Spread thus serves a specific niche: expressing directional conviction whilst acknowledging constraints on magnitude. This measured approach aligns well with disciplined risk management and efficient capital deployment across multiple positions.

The intrinsic value of the 7800 CE would be –

Max [0, Spot-Strike]

= Max [0, 7900 – 7800]

= 100

Since we purchased this option at a premium of 79, we would earn a profit of –

100 -79

= 21

The intrinsic value of 7900 CE would be 0, therefore we get to retain the premium Rs.25/-

Net profit would be 21 + 25 = 46

Scenario 4 – Market expires at 8000 (above the higher strike price, i.e the OTM option)

Both possibilities would have a beneficial intrinsic value.

7800 CE would possess an inherent worth of 200, while 7900 CE is valued at 100.

On the 7800 CE we would make 200 – 79 = 121 in profit

And on the 7900 CE we would lose 100 – 25 = 75

The overall profit would be

121 – 75

= 46

To summarise –

It should be apparent to you that there are two things that can be drawn from this.

Despite the decline of the market, the damage is limited to Rs.54, and this sum is also the maximum outflow possible through this strategy.

The maximum potential profit is limited to 46, which is the same as the spread minus the strategy’s net debit.

The spread refers to the difference between the buying and selling prices of a security. It is usually measured in terms of points or pips, with each point or pip equating to a specific monetary value.

The spread of an options contract is the difference between the higher and lower strike prices. It is the gap between the two prices at which the option can be exercised. The two prices are referred to as the call and put option strike prices.

The overall profitability of the strategy can be determined for any expiry value. Here is a screenshot of the calculations I performed on the excel sheet –

LS – IV – Lower Strike – Intrinsic value (7800 CE, ATM)

PP – Premium Paid

LS Payoff – Lower Strike Payoff

HS-IV – Higher strike – Intrinsic Value (7900 CE, OTM)

PR – Premium Received

HS Payoff – Higher Strike Payoff

The restriction of losses to Rs.54 and profit to Rs.46 can be observed. Thus, the parameters for a Bull Call Spread – Maximum loss and Maximum profit – can be determined.

Bull Call Spread Max loss = Net Debit of the Strategy

Net Debit = Premium Paid for lower strike – Premium Received for higher strike

Bull Call Spread Max Profit = Spread – Net Debit

This is how the payoff diagram of the Bull Call Spread looks like –

There are three important points to note from the payoff diagram –

In the event of Nifty expiring lower than 7800, the strategy results in a loss, but it is limited to Rs.54.

The breakeven point is reached when the market closes at 7854. To summarize, the breakeven level for a bull call spread is Lower Strike + Net Debit.

The strategy can be profitable if the market surpasses 7854. Its highest potential profit is Rs.46, being the difference between the strikes minus the net debit.

7900 – 7800 = 100

100 – 54 = 46

You may be curious as to why someone would pick a bull call spread over simply purchasing a plain vanilla call option. The primary reason is that it’s much less expensive.

Given your outlook is ‘moderately bullish’, you can opt for buying an ATM option, at a cost of Rs.79. But if the market moves against you, your loss would amount to the same amount as well. Therefore, a bull call spread is a better option which reduces the overall cost to Rs.54 and also caps your upside potential. That said, it is a fair deal given that you are only moderately bullish on the stock/index.