Bull Spread

A bull spread is an options strategy that pairs two options of the same type and expiry at different strikes so that the position gains if the underlying asset rises in price. The trader buys the option with the lower strike and sells the option with the higher strike. Both the largest possible profit and the largest possible loss are known when the trade is opened.

It is a vertical option spread and the opposite of a bear spread. Traders use it when they are moderately bullish and want a defined risk. It can be built with calls, at a net cost, or with puts, for a net credit. In futures markets the same name describes buying a nearby delivery month and selling a later one.

• Bull call spread. The trader buys a call option at a lower strike and sells a call at a higher strike. The call bought costs more than the call sold, so this is a debit spread. See bull call spread.
• Bull put spread. The trader sells a put option at a higher strike and buys a put at a lower strike. The put sold is worth more than the put bought, so the trader receives a net credit. The purchased put limits the loss if the price falls sharply.

Let $K_L$ be the lower strike price, $K_H$ the higher strike, and $W = K_H - K_L$ the width between them. For the call version, with net premium paid $D$:

For the put version, with net premium received $C$:

In both, the maximum profit is earned when the underlying finishes at or above the higher strike, and the maximum loss when it finishes at or below the lower strike.

A share trades at $100 and a trader expects a modest rise over two months.

Call version: buy the $100 call for $4.50 and sell the $110 call for $1.50. The debit is $3.00. The maximum profit is 10 − 3.00 = $7.00, the maximum loss is $3.00, and the break-even is 100 + 3.00 = $103.

Put version: sell the $100 put for $4.00 and buy the $90 put for $1.50. The credit is $2.50. The maximum profit is $2.50, the maximum loss is 10 − 2.50 = $7.50, and the break-even is 100 − 2.50 = $97.50.

The call spread needs the share to climb above $103 to make money and loses its whole cost if the share stays at $100. The put spread keeps its whole credit if the share stays at or above $100 and loses only below $97.50. The first is a bet that the price will rise; the second is a bet that it will not fall far.

The debit version has a small fixed cost and a larger gain relative to that cost, with a lower chance of success. The credit version has a higher chance of a small gain and a larger possible loss, and the broker will hold margin against it, usually equal to the maximum loss.

Time and volatility affect the two differently. Time decay, measured by theta, tends to work for the credit spread and against the debit spread when the price is near the lower strike of the call spread or the upper strike of the put spread. High implied volatility makes options expensive, which favors collecting premium through the put version. Low implied volatility makes the call version cheaper. When both versions use the same two strikes and the options are European in style, put-call parity makes their payoffs almost identical, and the choice comes down to cost, liquidity and assignment risk.

A bull spread loses if the price falls or, for the debit version, fails to rise by expiry. The loss is capped but can be the full amount at stake. Against simply buying the asset, the spread uses less capital and limits the downside, but it also limits the gain and expires on a set date.

With American-style options the short leg can be assigned early. A short put that is deep in the money may be assigned, obliging the trader to buy shares, and a short call may be assigned before a dividend. A price that ends between the two strikes at option expiry results in only one leg being exercised and leaves a share position, so many traders close the spread beforehand. Commissions and bid-ask costs are paid on both legs.

In commodity futures, a bull spread is a purchase of a nearby futures contract and a sale of a more distant one in the same commodity. It gains when the near month strengthens relative to the far month, as tends to happen when supplies tighten and the market moves toward backwardation. This is a form of calendar spread, and unlike the options version its loss is not capped by its structure.