Bull call spread: A strategy for a moderate price rise

When you expect a moderate rise in the market, a bull call spread is one of the options strategies you can use to express that view while capping both potential gain and loss at expiration. As it helps you express a modest bullish view, the strategy also sets a ceiling on both the loss and gain at expiration, making it a suitable choice for those who prefer to adopt a defined-risk strategy.

In this article, we'll cover bull call spreads' two-leg structure, work through a payoff example and see the available Bybit trading routes for this strategy.

Key Takeaways:

• A bull call spread is based on buying a lower-strike call and selling an equal quantity of a higher-strike call with the same expiration date.

• The premium received from the short option reduces the cost of the long call, while the short call also caps the upside.

• This article explains the payoff structure of the bull call spread, then shows you how to set up the strategy on Bybit.

What is a bull call spread?

A bull call spread is a bullish debit spread that uses two call options. You use it when you hold a positive view of the underlying asset.

The strategy is generally suited to a view that the underlying will rise only moderately by expiration. If you expect a steady move higher, rather than a dramatic surge, this strategy may be a suitable tool. It also offers contained profit and loss profiles.

A bull call spread differs from buying a single call in both cost and risk/reward. Selling the higher-strike call reduces the upfront premium and therefore lowers the maximum loss compared with buying the same lower-strike call alone. In exchange, it also caps the maximum gain.

How does a bull call spread work?

A bull call spread uses two call options that share the same underlying asset, expiration date and contract quantity. You build it by buying a call at a lower strike price and selling a call at a higher strike price. Typically, the long call is either ATM or an ITM contract somewhat below the current market price, while the higher-strike short call is OTM.

Your cost to enter the trade results in a net debit, since the premium you pay for an ATM or ITM call is normally higher than what you collect by selling an OTM one. To calculate the net debit paid, subtract the premium you receive for the short call from the premium you paid for the long call.

The short call at the higher strike does two things simultaneously: 

• It brings down your entry cost by offsetting a portion of what you paid for the long call. 

• It caps your potential gains, since the higher strike’s intrinsic value on expiration offsets your long call’s intrinsic value. 

As such, the higher short call sets the upper limit on what your overall strategy can earn.

Bull call spread payoff: Example and breakeven

Let’s consider a hypothetical asset-neutral bull call spread example, using prices expressed as units. You buy a 100-strike call for a premium price of 7 units, and sell a 110-strike call for a price of 3 units.

Applicable formulas:

• Net debit = premium paid for the long call − premium received for the short call = 7 − 3 = 4 (debit)

• Maximum loss = net debit = 4 (debit)

• Breakeven = lower strike + net debit = 100 + 4 = 104

• Maximum profit = (higher strike − lower strike) − net debit = (110 − 100) − 4 = 6

You pay 4 units to open the spread position, and that amount is the most you can lose. The loss reaches its maximum when the underlying price finishes at or below 100, because both calls expire worthless. At 104, the long call is worth 4 units at expiration, which offsets the 4-unit net debit, so you break even. And at or above 110, the short call caps your gain at 6 units, no matter how much higher the price climbs.

Note that our example above doesn't take transaction fees into account, and the actual payoff will scale with position quantity.

When might you use a bull call spread?

You can use a bull call spread when your outlook is moderately bullish, and you have a plausible price target somewhere near the higher strike price. You’d normally expect the asset’s price to rise, but not to surge far beyond that level.

Your choice of strike width and expiration are critical factors, as they set the risk-vs.-reward parameters of your strategy. A wider spread changes the balance between what you can gain and what you stand to lose. Expiration also affects the premiums of both legs and therefore the spread's net debit. A later expiration gives the underlying more time to move, but the effect on the spread's entry cost depends upon the pricing of both calls.

Also, keep in mind that a strong rally above the short call's strike price doesn’t add to the spread's maximum gain at expiration. Once the price passes that strike, your gain stays capped. If you expect a sharp, extended move well past your target, a bull call spread leaves that upside potential on the table.

Benefits and risks of a bull call spread

A bull call spread costs less than a single call, but it also limits your upside. The table below outlines the trade-offs involved.

If the price doesn’t rise as you expected, you lose the debit you paid. The loss is limited, but it’s still a loss.

Fees and liquidity may also affect the outcome. Both legs of the spread carry trading costs, and thin liquidity can make entering or exiting the position more expensive, due to wider bid/ask spreads and slippage.

Before expiration, the spread's value can change with time and implied volatility (IV). Your position can be worth more or less than you expect, even when the price hasn’t yet reached your target.

How to trade a bull call spread on Bybit

The route you choose depends upon the market you want to trade. For crypto Options, start from Trade → Options. And for Perp Options on TradFi assets (USDT Perp only), start from TradFi → Options. Otherwise, the strategy setups are similar.

On the Bybit App

Switch to Pro mode and open Strategies, then Call Spread. Choose your asset [e.g., BTCUSDT for Bitcoin (BTC)] and contract expiration. Specify the details of your two calls: the lower strike for Buy and the higher strike for Sell.

Before proceeding, review the payoff graph, total margin required and max profit. When ready, tap on Create Strategy, then tap on Confirm to launch your bull call spread.

On the Bybit website

Open Strategy or Position Builder from the Options interface. Both routes take you to the strategy builder. Select Directional → Call/Put Spread and use the search function to choose your underlying asset (by default, it’s BTCUSDT) in the top-left corner.

There are two rows on this page to set your calls, one for each options contract. For each contract, specify its expiration date (identical for both), strike price and quantity (identical for both). Ensure that both contracts' type is Call and their direction is Buy for the lower strike and Sell for the higher strike. When ready, click on Send to Order Book, review the details and click on Confirm.

The bottom line

A bull call spread lowers your cost as compared with buying the same lower-strike call alone. In exchange, your gains are capped due to the higher strike. This strategy fits a moderately bullish view with a defined price target. The most you can lose is the net premium paid.

If this profile matches your outlook, profit expectations and risk tolerance, explore Bybit Options to build your bull call spread strategy.

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