Call spread

A call spread pairs a long call and a short call on the same underlying security, typically with the same expiration month and different strike prices (a vertical spread). The premium collected from the short call offsets the premium paid for the long call, reducing the position's cost — and in exchange, capping its profit potential.

The direction of the spread depends on which strike you buy. In a call debit spread (bull call spread), you buy the lower strike and sell the higher strike, paying a net premium. For example, buying a 50 call for $5 and selling a 55 call for $2 costs a net $3. Maximum loss is the $3 net debit; maximum gain is the $5 difference between strikes minus the $3 paid, or $2 per share; and breakeven is the long (lower) strike plus the net debit, or 53. A call credit spread (bear call spread) reverses the legs — sell the lower strike, buy the higher strike — collecting a net premium and profiting if the stock stays below the short strike. There, maximum gain is the net credit, maximum loss is the difference between the strikes minus that credit, and breakeven is the short (lower) strike plus the net credit. These formulas hold for vertical call spreads; if the two legs carry different expirations (a calendar or diagonal spread), the payoff turns on time decay and volatility instead of strike-width arithmetic.

Traders use call spreads to express a moderately bullish or bearish view at a lower cost and with defined risk. The mnemonic for spread behavior: debit spread holders want the difference between the two premiums to widen, while credit spread holders want it to narrow, and ultimately for both options to expire worthless.

Spreads are heavily tested options material. The Series 7 exam asks you to calculate maximum gain, maximum loss, and breakeven for call spreads and to classify them as bullish or bearish, debit or credit. The Series 9 exam goes further, covering supervision of advanced strategies including ratio call spreads.