Moderately Bullish to  Bullish

The Bull call spread requires the trader to purchase a call option on an underlying stock. while simultaneously selling equal number of option contracts with the same expiration month at a higher strike price.  This strategy is also known a s a "vertical spread".  

Application

The Investor will generally use a bull call spread when he or she is moderately bullish on the underlying.  Because the investor receives a credit for the written, or sold options, the initial cost of the opportunity is lowered. The bull call spread may also be used as a repair strategy should an initial  long call purchase go the wrong way.

The bull call spread can be considered a doubly hedged strategy. As mentioned, the premium paid for the lower strike price is partially off-set by the premium collected for the written option.  The investor has therefore reduced the risk of the long call purchased by hedging it with the call sold.

As a second hedge, if the investor is assigned the written call, and must sell the equivalent shares of the underlying at the higher strike price, those shares may be purchased at the lower strike by exercising the long calls. 

Risk vs. Reward

Maximum Profit: Limited Difference Between Strike Prices - Net Debit Paid

Maximum Loss:  Limited Net Debit Paid

Upside Profit at Expiration:
Stock Price - Strike Price - Premium Paid
Assuming Stock Price above Break Even Point

A bull call spread tends to be profitable when the underlying stock increases in price. It can be established in one transaction, but always at a debit (net cash outflow). The call with the lower strike price will always be purchased at a price greater than the premium received from the written call with the higher strike price. Maximum loss for this spread will generally occur as the underlying stock price declines below the lower strike price. If both options expire out-of-the-money with no value, the entire net debit paid for the spread will be lost.

The maximum profit for the spread will usually occur when the underlying stock price rises above the higher strike price, and both options expire in-the-money.  This will be the case no matter how high the underlying stock has risen in price. If the underlying stock price is in between the strike prices when the calls expire, the long call will be in-the-money and worth its intrinsic value. The written call will be out-of-the-money, and expire worthless.

Volatility

The Implied volatility of an option is a measure of the amount by which the underlying security is expected to fluctuate over a period of time.  It reflects the markets expectations and can change at any time based on news or other events affecting the stock.

Volatility Increases:  Varies
Volatility Decreases: Varies

The effect of an increase or decrease in the volatility of the underlying stock may be noticed in the time value premiums. The net effect on the strategy will depend on whether the long and/or short options are in-the-money or out-of-the-money, and the time remaining until expiration.

A bull call spread will not widen out to its maximum profit potential right away.  A short term increase in volatility will generally have a negative effect on this strategy.  For short-term trades, the purchase of an out-right call is generally a better alternative.

Time Decay?

Passage of Time: Varies

The effect of time decay varies depending on the relationship between the underlying share price and the strike prices of the options.  

Before expiration?

A bull call spread may be offset in one transaction, or "legged" out of, depending on the value of the position.  It is not uncommon for advanced traders to sell the long position for a profit and allow the written option to expire worthless.  This means of off-setting is not recommended for the beginner since you are left with a naked position. 

Upon Expiration?

In a situation where both options are in-the-money, the trader will generally off-set to avoid the commission costs resulting from exercise and/or assignment.  If only the purchased call is in-the-money upon expiration, the investor may choose to exercise,  off-set the entire position if possible, or off-set the profitable leg and allow the written option to expire worthless.  Regardless, this must be done prior to market close on expiration Friday.

An Example

As mentioned, the bull call spread represents a low risk, low reward strategy for situations in which a mildly bullish move is expected. The easiest way to create a bull spread is using  a call options at or near the current market price of the stock. If the underlying stock is trading at $19.00, you could buy a $20.00 call and, correspondingly sell a $22.50 call.

With SYMC Trading at $19.95, the bullish investor might buy one April 20 call and sell one April $22.50 call.  By selling the $22.50 call, the investor lowers their risk exposure, however,  upside profit potential is also compromised. The cost for the $20.00 call would be $1.20, the investor would then receive $0.45 for the sale of the $22.50 contract.  In this example, the total cost and potential loss, would be $75.00 ($1.20 x 100 - $0.45 x 100).

The maximum profit of this position is $175.00, the difference between the strike prices less the $75.00 paid to create the position. Even if the stock goes to $25.00, The investor will only make $175.00 because while the $20.00 call is worth $5.00, the 22.50 call sold is worth $2.50. To close the position, the strategist would have to pay $2.50 for the $22.50 call when you sell the $20.00 call for $5.00. The limited upside is the price paid for lowering the risk exposure (from $120.00 to $75.00) through the bull call spread.