Introduction
Suppose you are moderately bullish about a stock/index and you feel that it has room to run but its not going to be gangbusters. Then you could buy a call outright but that could be expensive. What you could do is buy the call and then sell a call at a higher strike to mitigate the cost of your (moderately) bullish outlook.
A long call spread (or a bull spread) contains two calls with the same expiration but different strikes. The strike of the short call is higher than the strike of the long call. The short call’s main purpose is to help pay for the long call’s upfront cost.
Example
The Max loss is the net premium paid: Rs.1825.00
For the trade to break even, the NIFTY should end above 6786.50 at expiration (April 24).
The Max profit at expiration is Rs.3175.00
The greeks
The long call is more sensitive to changes in the underlying than the short call due to its ATM-ness.
All the greeks, δ, θ, κ, and λ are higher for the long call than for the short call.
The long-call will lose money faster to time decay than the short call.
By freezing all other inputs, you can observe θs across different strikes of the bull spread at different values of the NIFTY as expiry approaches:
Time decay is helpful to this position when it is profitable and harmful when it is loss-making.
Similarly, observe how δs of the bull spread at different values of the NIFTY as expiry approaches:
Exiting the trade
If the trade is profitable, allow time-decay to work for you. You could even hold this to expiration. If the position is moving against you, it is best to cut your losses.