Combining Options

The Bull Call Spread

A long lower-strike call and short higher-strike call create a capped upside profile.

highlighted = computed this step

Combined payoff

This spread is long the $100.00 call and short the $110.00 call, so it starts at zero and rises to a cap.

payoff(S)=max⁡(S−(100),0)−max⁡(S−(110),0)\text{payoff}(S)=\max(S-(100),0)-\max(S-(110),0)
Bull call spreadPayoff at expiry.Bull call spreadK=$100K=$110$80$100$110$120$-1.00$+0.00$+11.00Underlying price at expiryPayoff

Capped payoff

The capped payout is $10.00; at $80.00 payoff is $0.00; at $110.00 it is $10.00; then it stays flat.

payoffbull spread=max⁡(S−(100),0)−max⁡(S−(110),0)\text{payoff}_{\text{bull spread}} = \max(S-(100),0)-\max(S-(110),0)
Bull call spreadPayoff at expiry.Bull call spreadK=$100K=$110$80$100$110$120$-1.00$+0.00$+11.00Underlying price at expiryPayoff

Payoff convention

This chart is at expiry, so no time path or premium effects are included. The cap is $10.00 here, gross PAYOFF and not net of any debit to enter the spread. This is payoff geometry, not investment advice.

cap,gross payoff\text{cap}, \text{gross payoff}
Bull call spreadPayoff at expiry.Bull call spreadK=$100K=$110$80$100$110$120$-1.00$+0.00$+11.00Underlying price at expiryPayoff