Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Bull Call Spread

Risk: low
Reward: low

General Description
Entering a bull call spread entails buying calls and then selling an equal number of calls at a higher strike (same expiration month).

(draw a bull call spread risk diagram here)

The Thinking
You're bullish and are confident a stock will move up, but you think the upside is limited. You buy calls to profit from a rally, and sell higher strike calls to 1) help pay for the long calls and 2) to lower your risk (your breakeven is more favorable and your max loss potential is lower). If the stock rallies, preferably above the upper strike, you'll profit.

XYZ is at $42. You are bullish and think the stock can rally a few points but don't think it will surge higher. You buy (1) 40 call for $3.50 and sell (1) 45 call for $1.00. The net debit is $2.50.

Below $40, all the calls expire worthless, and your loss is the net debit paid when the trade was initiated.

If the stock trades flat and closes at $42, the 40 calls will have decreased in value from $3.50 to $2.00 ($1.50 loss) and the 45 calls will have decreased in value from $1.00 to being worthless ($1.00 profit) for a total loss of $0.50.

If the stock rallies to $45, the 40 calls will have increased in value from $3.50 to $5.00 ($1.50 profit) and the 45 calls will have decreased in value from $1.00 to being worthless ($1.00 profit) for a total profit of $2.50.

Above $45, the profit from the long call and loss from the short call cancel each other out.

Selling the upper strike call reduces your downside risk and lowers your breakeven level (compared to if you had just bought the 40 calls), but it also caps your upside potential.

The PL chart below graphically shows where this trade will be profitable and at a loss.