What it is
You buy a call, often at today's price, and sell another call at a higher strike with the same expiry. The sold call's premium covers part of the bought one, so the trade costs less than the call alone. Also called a bull call spread.
The sold call is a cap. Above its strike, anything the bought call gains is owed back on the sold one, so the profit stops at the gap between the strikes less what was paid. Both the cost and the most it can make are known before it opens.
What has to happen for it to make money
The stock has to rise past the lower strike plus the net cost. At the upper strike or above, the spread is worth its full width and pays its maximum. Below the lower strike both calls expire and the cost is lost.
It needs a moderate rise, not a dramatic one, since anything past the upper strike earns nothing extra. Time hurts it, less than it hurts a lone call, because the sold call decays as well, and changes in volatility move it less for the same reason.
Once it is on
If the stock reaches the upper strike well before expiry, the spread is usually worth less than its full width until the last days, because the sold call still carries time value. Holders choose between taking most of the profit early and waiting for the rest. If the stock finishes between the strikes, the bought call may be exercised automatically and the sold one not, so closing both is the cleaner end.
What goes wrong
No rise, or not enough. Below the lower strike the whole cost is lost, the same as an unsuccessful long call, only smaller.
A bigger rise than expected. Not a loss, but the cap means a stock that runs far past the upper strike pays the same as one that just reaches it, and the gain the lone call would have caught is gone.
Pros and cons
- Pro: costs less than buying the call alone.
- Pro: the most it can lose and gain are fixed at the open.
- Pro: less hurt by time and volatility than a lone call.
- Con: the gain stops at the upper strike.
- Con: still needs the stock to rise, and in time.
- Con: two legs to fill and two to close.
In Restrike
The two calls fold into one position, a call debit spread, on the Log and the Portfolio, with the outcome shown against the most it could have made. The win rate your debit spreads need, given their cost and width, sits beside the rate they achieved. Import is read-only, and Restrike never places a trade.