A Bull Spread strategy may be implemented using either puts or calls. The strategy may be best used when investors are moderately bullish on a stock. Importantly, the strategy potentially offers limited risk but also limited reward. 

Risk and reward is determined by the strike prices selected. Generally, out-of-the-money Bull Spreads offer greater reward but much more risk.

For simplicity we use call options in this example, meaning the investor is moderately bullish on the stock. Key features of this example include:

• Buy a Call 
• Sell a Higher Strike Call 
• Same expiry month
• Open at a debit [the call the investor buys (lower strike) is more expensive than the one they sell (higher strike), meaning they pay more than they receive. This net payment is the debit.]
• Profit from a bullish directional move
• No margin required

Example

As with all ASX-published options strategies, the stock featured is provided for illustrative and educational purposes only, and is not intended as financial advice. 

Do further research of your own or talk to a financial adviser who is an Accredited Derivatives Adviser before acting on information in this article.

Using a hypothetical example, key details include:

The investor’s view is that XYZ could increase in value above $20.50 before 18 December 2025.

• Net cost 87¢– 68¢ = 19¢ ($190 – per contract)
• Difference between strike prices ($21-$20.50) = 50¢
• Potential profit 50¢ – 19¢ = 31¢ ($310)
• Breakeven = $20.69
• Maximum Risk = $190
• Maximum Reward = $310
• Maximum return on investment = 163%

Main benefits of strategy:

1. Provides exposure to a rise in the share price.
2. Lower cost strategy than outright purchase of call.

Main risks of strategy

1. Watch the cost of the spread – the potential reward must justify the risk.
2. Factor in commission costs – brokerage is payable on both legs of the strategy on entry, and again on unwinding the strategy.
3. If the share price at expiry is below the lower strike price, both options will expire worthless, and the cost of the strategy will be lost.

Other considerations

Limited risk/limited reward: the Bull Spread is a cheaper strategy than simply buying a call option. As a result, the profit potential is also reduced. 

Follow-up action 

If the stock unexpectedly rises sharply, it may be advisable to exit the strategy once the upper strike price is reached (in this case at $21). 

Although time value is helpful around the strike price of the short leg, unwinding the strategy early removes the risk of exercise on the short call. 

If the stock price falls suddenly, the spread may be unwound before the taken call loses too much time value.

Points to remember

• Consider using the Bull Spread when expecting a limited rise in the price of the stock. 
• Be sure that the cost of the spread is justified by the potential reward. 
• Do not 'leg in' to this strategy - enter the trade as a Tailor Made Combination (TMC) and unwind it as a TMC. [A TMC allows investors to create and execute multi-leg options strategies as a single order as a specific net price].

Which strikes to use

As with all option strategies, use of the Bull Spread depends on one’s risk profile. In Options as a Strategic Investment, Lawrence G. McMillan suggests that spreads can fall into three categories:

1. Aggressive Bull Spread: Underlying price close to the lower strike price.
2. Extremely Aggressive Bull Spread: Both strikes are out-the-money, meaning both are above the current underlying price. The example above falls into this category. This strategy does have large profit potential, although the risk of losing your entire premium paid is higher, and as such should only be pursued with a small percentage of one’s speculative fund.
3. Least Aggressive Bull Spread. Both calls are in-the-money.

Conclusion

This article considered how investors could use options to trade a moderately bullish view on a stock, through the Bull Spread. Used effectively, the Bull Spread can potentially be a cheaper strategy than buying call options. But like all options strategies, the Bull Spread has risks that investors must consider before using it.
 

From ASX 

The free online ASX Advancing in Options Course explains options pricing in detail and how to manage and implement advanced options strategies. The course consists of 10 modules, each taking about 20 minutes.