Bull call spread and bear put spread: profit and loss

A bull call spread and a bear put spread each combine two options. One is bought, and a second with a different strike price is sold. The sold option lowers the cost but caps the profit. The bull call spread is a bet on rising prices, the bear put spread on falling prices. The basics are covered in the article Options explained simply: calls and puts by example.

What is a bull or bear spread?

Both strategies consist of two calls or two puts. The underlying, expiry and number of contracts are the same. Only the strike prices differ. Specialists call this a vertical spread.

In both cases, the bought option costs more than the sold option brings in. A net amount is therefore paid when the position is opened. This is called a debit spread, because the amount is debited.

Bull call spread: one call bought, a higher one sold

If the price rises, the bought call gains in value. The sold call with the higher strike price brings in a premium and so lowers the cost. In return, the profit stops at the higher strike price. Anything gained above that is lost again on the sold call.

Bear put spread: the mirror image for falling prices

Here everything is reversed. A put is bought, and a put with a lower strike price and the same expiry is sold. If the price falls, the bought put gains in value. The premium from the sold put lowers the cost, but below its strike price the profit does not grow any further.

Where is the break-even point?

The break-even point is the price at expiry at which there is neither a profit nor a loss. For the bull call spread, it is the strike price of the bought call plus the net cost. For the bear put spread, it is the strike price of the bought put minus the net cost.

The figures come from the examples above. Both can be tried out in the calculator below, along with a single bought call or put with a strike price of 100 at 5 each for comparison.

This is how to read the chart for the bull call spread:

1. The horizontal axis shows the price at expiry, the vertical axis the profit or loss per share.
2. Up to 100, the line stays flat at −3, the maximum loss.
3. Between 100 and 110 it rises and crosses the zero line at 103. A circle marks this break-even point.
4. From 110 it stays flat at +7. No further profit is possible.

For the bear put spread, the picture is mirrored: flat at +7 down to 90, break-even point at 97, flat at −3 from 100.

Spread or single option: what changes

Compared with the call alone, the spread in the example costs 3 instead of 5. Its break-even point is 103 instead of 105. In return, its profit stops at 7, while with the call alone it remains open-ended.

Below a price of 112, the spread in the example produces the better result. At 112 both stand at +7, and above that the call alone comes out ahead. The same pattern applies in the other direction to the bear put spread and a single bought put.

Before expiry, time and fluctuation also come into play. Time value is the part of the premium that shrinks over time. Its decline weighs less on the bull call spread than on a single bought call, and less on the bear put spread than on a single bought put. A change in expected fluctuation has only a slight effect, other things being equal. The two options partly offset each other, but depending on how the price moves, the change can hit one of them harder. How time and fluctuation change the option price is explained in the article Option Greeks explained simply.

Credit variants: bull put spread and bear call spread

The same directions can also be taken with the other type of option. In a bull put spread, a put is sold and a put with a lower strike price is bought. In a bear call spread, a call is sold and a call with a higher strike price is bought. Here the sold option is worth more than the bought one, so a net premium is received. This is called a credit spread, because the amount is credited.

Bull and bear describe the direction, debit and credit the flow of payments. With credit spreads, the maximum profit is the premium received. The possible loss exceeds it as soon as the gap between the strike prices is more than twice the premium.

Risks and limits

Limited does not mean small. All four spreads can lead to losses, and the calculation at expiry does not show every risk.

• Total loss of the stake: With the bull call spread and the bear put spread, the entire net cost can be lost, possibly within a short time. In the example this is 3 per share. What counts is not only the direction of the price move but also its timing.
• Capped profit: Above the higher strike price (bull call) or below the lower one (bear put), any further profit is forgone.
• Credit spreads: The loss can exceed the premium received, in the example 7 compared with 3.
• Two transactions: Trading both options at the same time at the desired price can be difficult or impossible. If one side remains open while the other is closed, the risk increases.
• Costs: Fees are charged for each option. A marked price move may therefore be needed before any profit arises at all.
• Market: A position can be closed with an offsetting transaction, meaning the same options are traded in the opposite direction. This requires a functioning market, which is not guaranteed, for example during trading halts.

The US options exchanges and their clearing house OCC (Options Clearing Corporation) jointly publish a risk disclosure document. The June 2024 edition describes combinations such as spreads as more complex than a single option and states: ‘a complexity not well understood is, in itself, a risk factor.’ According to the document, not every options strategy is suitable for all investors.

When the sold option is exercised early

American options can be exercised at any time up to expiry, European options only at expiry. If the sold option is American, it can be assigned at any point during its term. Assigned means that the seller must now deliver or take delivery. This side of the spread falls away, and the risk of the position changes substantially.

With the bull call spread, this usually only happens when the share goes ex-dividend. Ex-dividend means without entitlement to the next dividend. With the bear put spread, it usually only occurs when the price is far below the strike price. Takeovers or special dividends can break these patterns. Expiry itself also carries a risk. If the price is then close to the strike price of the sold option, it may only become clear on the next trading day whether the option was assigned.

On Eurex, the derivatives exchange of the Deutsche Börse group, options on single shares are mostly American. For 119 shares, including Roche, European options are also available (as of 6 June 2024). Eurex noted: ‘there is no early assignment risk on European style options.’ Options on the SMI (Swiss Market Index) and EURO STOXX 50 equity indices are European there and are cash-settled, meaning in money rather than in shares (as of October 2026).

Conclusion

A bull call spread and a bear put spread combine a bought and a sold option of the same type and term. The sold option lowers the cost and caps the profit. In the example, both cost a net 3, the break-even points are 103 and 97, and the profit stops at 7. At expiry the loss is limited to the net cost, but that cost can be lost in full. Fees, two transactions and possible early assignment are additional risks.