N° 07Multi-leg strategy

Bull Call Spread.

Buy a call and sell another one, higher, same expiry. The premium collected cuts the entry cost — in exchange, the gain stops growing beyond the second strike.

Outlook : moderately bullishRisk : moderate

Payoff simulator at expiration

Max gain

$700

Max loss

$300

Breakeven(s)

$103.00

Parameters

Current stock price · $Strike of the call BOUGHT · $Premium (per share) · $Strike of the call SOLD · $Premium collected on the short call · $

1 contract = 100 shares. All values are per share unless otherwise noted.

When to use it?

A rise seen as likely but limited. The short call funds part of the purchase: the breakeven sits lower than on a plain call, and the maximum loss is known up front.

When to avoid it?

A violent upside move: the gain is capped at the second strike, and everything beyond it is given up. Two legs also mean two bid-ask spreads to cross, on the way in and on the way out.

How it works

Two legs, same expiry: • BUY a call at the lower strike — this is the leg that carries the upside. • SELL a call at the higher strike — the premium collected reduces the outlay. The net cost is the difference between the two premiums (a debit). It is also the maximum loss. At expiry: • Below the lower strike: both calls expire worthless. Loss = net debit. • Between the two: the long call has value, the short one does not. The gain rises linearly. • Above the higher strike: both have value and their difference is fixed. The gain stops moving.

Concrete example

Stock at $100. Buy the 100 call at $5, sell the 110 call at $2. Net debit: $3 × 100 = $300. • Stock at $95 → both expire worthless. Loss = $300. • Stock at $103 → breakeven (100 + 3). P&L = 0. • Stock at $107 → gain = (7 − 3) × 100 = $400. • Stock at $110 → maximum gain = (10 − 3) × 100 = $700. • Stock at $200 → still $700. The extra $90 of upside goes to whoever bought the call you sold. Ratio: $300 at risk for $700 at best, with a breakeven $3 lower than on a plain call.

What the diagram does not show

The SHORT call can be assigned before expiry, especially the day before an ex-dividend date on an American option. Assignment delivers 100 short shares, and the bounded spread suddenly becomes a short position in the stock — with the margin call that comes with it. A second thing the diagram hides: it shows expiry. Before then, the position rarely matches the curve, because the two legs do not shed their time value at the same pace.

⚠ AMF disclaimer

Options are high-risk derivative products. Losses can exceed the capital initially committed (particularly for uncovered short positions). Polaris provides educational content only — this is not investment advice. Consult a registered advisor (AMF) before any decision and make sure you have the appropriate level of approval from your broker.

← Cash-Secured Put

Bear Put Spread →

How it works

Concrete example

What the diagram does not show