A long call vertical spread, also known as a bull call spread, is a bullish options strategy that involves buying a call option at a lower strike price and selling another call option at a higher strike price, both with the same expiration date. This strategy allows traders to potentially profit from an anticipated increase in the underlying asset's price while limiting both potential gains and losses.
Market Outlook: Bullish; expecting the stock price to rise above the lower strike price.
Risk: Limited to the net premium paid (debit) to establish the spread.
Reward Potential: Capped at the difference between the strike prices minus the net premium paid.
Time Decay Impact: Time decay can negatively affect the position, as the value of the options may erode over time if the stock price does not move as anticipated.
The profitability of a long call vertical spread depends on the relationship between the underlying asset's price and the strike prices at expiration:
Maximum Profit: Occurs when the stock price is at or above the higher strike price at expiration.
Maximum Loss: Occurs when the stock price is at or below the lower strike price at expiration, limited to the net premium paid.
Underlying Asset Price at Initiation: $50
Long Call Strike Price: $50
Short Call Strike Price: $55
Premium Paid for Long Call: $3
Premium Received for Short Call: $1
Net Premium Paid (Debit): $2
Breakeven Point at Expiration: $52 (Lower Strike Price + Net Premium Paid)
| Stock Price at Expiration ($) | Profit/Loss ($) |
|---|---|
| 50 | -2 |
| 52 | 0 |
| 55 | +3 |
| 57 | +3 |
Stock Price at Expiration: The market price of the underlying asset when the option expires.
Profit/Loss: Calculated as the difference between the spread width and the net premium paid when the stock price is above the higher strike price; otherwise, it's the difference between the stock price and the breakeven point, minus the net premium paid.
Maximum Profit: Occurs if the stock price is at or above the higher strike price ($55 in this example) at expiration, resulting in a profit equal to the difference between the strike prices minus the net premium paid ($5 - $2 = $3).
Breakeven Point: Occurs when the stock price at expiration equals the lower strike price plus the net premium paid ($50 + $2 = $52 in this example).
Maximum Loss: Occurs if the stock price is at or below the lower strike price ($50 in this example) at expiration, resulting in a loss equal to the net premium paid ($2).
Limited Profit Potential: The maximum profit is capped at the difference between the strike prices minus the net premium paid, regardless of how high the stock price rises.
Time Decay: As expiration approaches, the time value of the options decreases, which can negatively impact the position if the stock price does not move as anticipated.
Assignment Risk: If the short call option is in-the-money before expiration, there is a risk of early assignment, which could result in the obligation to sell the underlying asset at the strike price.
For investors seeking bullish exposure with different risk profiles, alternative strategies include
Long Call Option: Involves buying a call option outright, providing unlimited profit potential as the stock price rises, but with a higher upfront cost and the entire premium at risk.
Short Put Option: Involves selling a put option, allowing the trader to potentially profit from a stable or rising stock price, with the risk of being assigned the stock at the strike price if the stock price falls below it.
Bull Put Spread: Involves selling a put option at a higher strike price and buying another put option at a lower strike price, both with the same expiration date, to potentially profit from a stable or rising stock price with limited risk.
✔ Lower Cost Compared to a Long Call – The short call option reduces the net premium paid.
✔ Defined Risk and Reward – Maximum loss and maximum profit are known upfront.
✔ Moderate Stock Movement Needed – The stock does not need to rise significantly to be profitable.
✔ Time Decay Impact is Reduced – Since the short call option benefits from time decay, it offsets the time decay risk of the long call.
✖ Limited Profit Potential – Unlike a single long call, the upside is capped at the width of the spread.
✖ Stock Must Rise Before Expiration – If the stock remains below the breakeven price, the trade will result in a loss.
✖ Assignment Risk on the Short Call – If the stock price rises significantly, the short call might be assigned early.
To optimize profitability and manage risks, traders often implement the following strategies:
>Wider Spreads Provide Higher Profit Potential, But they require a greater move in the stock price.
>Narrow Spreads Are Safer, They cost less and require a smaller move to become profitable.
Close the Spread Early, If the short call is deep in the money, traders should close the spread early to avoid assignment.
Roll the Short Call, If the stock surges unexpectedly, rolling the short call to a higher strike price extends profitability while reducing risk.
If the trade is profitable but has time left, traders can roll the spread to a later expiration and widen the strike difference to capture additional gains.
If the stock approaches the short call strike price early, traders may exit to lock in profits before time decay erodes value.
If the stock moves against the trade, closing the position before full loss prevents unnecessary drawdowns.
| Factor | Long Call | Long Call Vertical Spread |
|---|---|---|
| Market Bias | Strongly Bullish | Moderately Bullish |
| Maximum Profit | Unlimited | Limited to the spread width minus premium paid |
| Maximum Loss | 100% of premium paid | Net premium paid (lower than long call) |
| Cost | High (since it’s a standalone call) | Lower due to the short call offsetting cost |
| Time Decay Impact | Negative, as calls lose value over time | Less impact due to short call’s positive theta |
| Best Used When | Expecting a strong bullish move | Expecting a moderate price increase |
If capital is limited, the spread reduces the premium cost.
If the stock is not highly volatile, reducing the need for unlimited upside.
If time decay is a concern, as the short call offsets some time decay losses.
Choose a stock or ETF that you expect to rise in price before expiration.
Buy a lower strike call (in the money or slightly out of the money).
Sell a higher strike call (out of the money).
A longer expiration allows more time for the stock to move.
A shorter expiration decays faster but provides quicker results.
Enter an order to buy the call spread using your brokerage platform.
Use a limit order to control execution price.
Track the stock’s movement and adjust the trade if needed.
Consider exiting early if the spread reaches near-maximum profit.
If the stock is above the short call strike price, the spread will expire at full profit.
If the stock is below the long call strike price, the trade will expire worthless with a full loss.
By understanding the mechanics, risks, and profit potential of long call vertical spreads, investors can effectively incorporate this strategy into their portfolios when anticipating bullish movements in underlying assets. However, due to the capped profit potential and the impact of time decay, it's crucial to have a well-thought-out risk management plan and ensure that such positions align with one's risk tolerance and investment objectives.