How do I construct a bull spread with call options, and when is it better than buying a naked call?

A bull call spread is one of the most fundamental and practical option strategies. It's a defined-risk, defined-reward directional bet that's cheaper than buying a naked call.

Construction:

1. Buy a call option at strike K_1 (lower strike)
2. Sell a call option at strike K_2 (higher strike), same expiration

K_1 < K_2, same underlying, same expiration.

The Economics:

• The long call gives you upside participation
• The short call caps your upside but reduces your cost (you collect premium)
• Net cost = Premium paid for K_1 call - Premium received for K_2 call

Payoff at Expiration:

Worked Example:

You're moderately bullish on Harmon Biotech, trading at $72.

• Buy 1 $70 call at $5.80
• Sell 1 $80 call at $2.30
• Net debit: $5.80 - $2.30 = $3.50

Key Levels:

• Max loss: $3.50 per share (net premium paid)
• Max gain: ($80 - $70) - $3.50 = $6.50 per share
• Breakeven: $70 + $3.50 = $73.50
• Risk/reward ratio: $3.50 / $6.50 = 0.54 (risking $1 to make $1.86)

Bull Spread vs. Naked Long Call:

When to Use a Bull Spread:

• You're bullish but have a specific price target (e.g., $80)
• You want to reduce premium cost (important for capital-constrained traders)
• Implied volatility is high (selling the upper call helps offset expensive premiums)
• You're comfortable capping your upside at K_2

Exam Tip: Know the construction (buy lower strike call, sell higher strike call), calculate max gain, max loss, and breakeven. The exam loves presenting the strategy from the payoff perspective and asking for profit at a specific stock price.

Practice option strategies in our CFA Level I derivatives question bank.