question on bull spread strategy

I dont seem to understand the logic behind the bull spread strategy. What is the use of shorting a call option with a higher exercise price? When i’m long a call option and the stock price goes below the exercise price, the option expires out the money and i will not lose anything except the premium paid to buy the call. what is the need for me to short a call?

The only advantage i see is that the premium paid to buy a call is reduced by the premium i receive for shorting a call. is this the only use of bull spread strategy??


Risk management . Look at the payoff diagram for bull spread . It is capped at the downside and the upside. you have to payout less on premium initially , because it is capped on the upside. So net loss on the premium if the both options expire worthless is less than a naked call.

Any spread is generally cheaper than a flat trade , even for options

you are betting in a spread interval as you may enlarge or tighten the exercise prices of both options.

the advantage you mention, the one stressed in the curriculum can be a considerable one when we talk about big plays. a mere bunch of basis points can mean $$$$

in my opinion it is a “I am half-bullish on the underlying” strategy…so why not reduce the upfront investment with the short call?

Yes. You sell the second call to help pay for the first call.

Thank you all for your response

Those are all valid answers. I would rather sell call at higher strike price if the volatility causing the option prices artificially higher during earnings announcements. You are basically transferring volatility costs to some one else. In practice, if you are buying lower strike calls during obnormal times the option prices are very high only due to volatility.

Wow, that last comment made no sense… I can’t even figure out what you were trying to say…

I think he was saying that you should sell calls when vol is high (which can happen around earnings announcements), so you get more proceeds…more real world application than CFA application

But I’m just guessing.