If you have a mildly bullish viewpoint on a stock this strategy is something you may want to consider capitalising on a modest advance in the price of the underlying stock. With a combination of market volatility and a moderately bullish viewpoint, the
Exchange Traded Options (ETO's) trader can minimise the funds invested in a position, enjoy minimal risk and potentially achieve a reasonable profit.
This strategy is much like buying long calls with the safety net of providing some downside protection. The protection adds to the cost of the strategy, hence being widely regarded as a low-risk, low-reward strategy. You may decide this is a relevant strategy if you either have reservations as to the bullishness of the stock or have a level of discomfort with the cost of simply purchasing the long call alone.
To create a Bull Call Spread you simultaneously buy a call option at one strike price whilst selling a call option at a higher strike price, all at the same expiration date. This makes it a debit spread; as the cost of buying the lower call contract will be more than the premium received from the call contract sold at the higher strike price.
The diagram below shows the “X” horizontal axis representing the share price increasing as the line travels to the left, with the blue line representing the return from the strategy at expiration. The maximum loss occurs if the share price falls below the lower strike price. If both expire out-of-the-money, with no value, then the entire net debit paid for the spread will be lost. The trader should look to exit the strategy before this occurs.