Details about Bull Call Spread Option Trading with Payoff Chart exaplined with an example
Proceeding further on our series of options trading, in this article we cover the trading example and payoff function for Bull Call Spread.
First let's start with the basics - What is an option spread? See the following article on Options Spreads which clearly details the what the various spread are and the naming convention followed.

So let's concentrate back on Options Bull Call Spread.

Example & Payoff Function of Bull Call Spread

As the name suggests, the Bull Call Spread is made up of Calls i.e. 2 call option positions are used to make up a Bull Call Spread. The word Bull indicates that it will be profitable to the BUYER of this Bull Call Spread if the market goes up. And lastly, the word spread indicates that both the profit and the loss are limited i.e. spread within a limit, hence the name Bull Call Spread.
How to construct a Bull Call Spread?
The Bull Call Spread is one of simple options spread trading strategy which can be constructed simply by taking 2 positions:
1) Buy or Long an In the Money (ITM) Call Option and

2) Sell or Short an Out of the Money (OTM) Call Option
(See Moneyness of Options - OTM, ATM, ITM Options to know about ATM, ITM and OTM options)

Now, what you get when you combine such a structure of above mentioned 2 call options? Let's get into the Bull Call Spread Payoff Function

Payoff Function Chart of Bull Call Spread:
Suppose that you have a near term bullish view on IBM stock. Now important thing here is that you have a moderately bullish view i.e. you expect that IBM stock (underlying) might go up marginally, say by 3-5% in next 2 months time. (It is not an aggressive bullish view which could mean 10%+ change).
Also, you do not want to loose all your money by buying the naked call option on IBM stock. Although you have a bullish view, You still want to limit your losses in case your prediction goes wrong.
So with this moderately bullish view and less risk-taking behvaiour makes it ideal for you to get into a Bull call spread position for options trading.
Now, let's construct the Bull Call Spread using the above 2 call positions. Proceed Further to Bull Call Spread Payoff Function & Example