A bull call spread is an options strategy used to express a positive or bullish view on the underlying asset, often a broad equity index. By using a spread instead of a naked option, both the profit and loss are limited, and the cost (or premium) for implementing the strategy is limited.
The investor buys a call with strike price X1, paying a premium for doing so. As the stock price rises above X1, the position will start to make money as the option becomes ‘in the money’ (that is, ‘in’ the money for the buyer of the option). If this were a naked long call, then potential gains could be unlimited if the stock price keeps rising. However, using a spread limits these gains, by selling a call with a strike price X2. As the price rises above X2, the long and short calls offset each other and there is no impact on the profit of the strategy. The reason to limit gains in this manner is to reduce the overall premium paid. An investor would implement such a strategy if they felt that the stock price was going to go up, but not by much.
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