Chapter 7: Bull Spreads 177 
time to maturity than the short call has. Such a position is known as a diagonal bull 
spread and is discussed in a later chapter. 
Experienced traders often tum to bull spreads when options are expensive. The 
sale of the option at the higher strike partially mitigates the cost of buying an expen­
sive option at the lower strike. However, one should not always use the bull spread 
approach just because the options have a lot of time value premium, for he would be 
giving up a lot of upside profit potential in order to have a hedged position. 
With most types of spreads, it is necessary for some time to pass for the spread 
to become significantly profitable, even if the underlying stock moves in favor of the 
spreader. For this reason, bull spreads are not for traders unless the options involved 
are very short-term in nature. If a speculator is bullishly oriented for a short-term 
upward move in an underlying stock, it is generally better for him to buy a call out­
right than to establish a bull spread. Since the spread differential changes mainly as 
a function of time, small movements in price by the underlying stock will not cause 
much of a short-term change in the price of the spread. However, the bull spread has 
a distinct advantage over the purchase of a call if the underlying stock advances mod­
erately by expiration. 
In the previous example, a bull spread was established by buying the XYZ 
October 30 call for 3 points and simultaneously selling the October 35 call for 1 point. 
This spread can be compared to the outright purchase of the XYZ October 30 alone. 
There is a short-term advantage in using the outright purchase. 
Example: The underlying stock jumps from 32 to 35 in one day's time. The October 
30 would be selling for approximately 5½ points if that happened, and the outright 
purchaser would be ahead by 2½ points, less one option commission. The long side 
of the bull spread would do as well, of course, since it utilizes the same option, but 
the short side, the October 35, would probably be selling for about 2½ points. Thus, 
the bull spread would be worth 3 points in total (5½ points on the long side, less 2½ 
points loss on the short side). This represents a 1-point profit to the spreader, less two 
option commissions, since the spread was initially established at a debit of 2 points. 
Clearly, then, for the shortest time period one day - the outright purchase outper­
forms the bull spread on a quick rise. 
For a slightly longer time period, such as 30 days, the outright purchase still has 
the advantage if the underlying stock moves up quickly. Even if the stock should 
advance above 35 in 30 days, the bull spread will still have time premium in it and 
thus will not yet have reached its maximum spread potential of 5 points. Recall that 
the maximum potential of a bull spread is always equal to the difference between the 
striking prices. Clearly, the outright purchaser will do very well if the underlying 
stock should advance that far in 30 days' time. When risk is considered, however, it