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Most states require licensed drivers to carry auto liability insurance — and for good reason. Liability coverage helps pay for the damages to other people involved in a car accident if it’s determined you were responsible.

State law may leave it up to the individual to decide if they want to carry the kind of insurance that will help pay to repair their own wrecked car or injured body. But in most cases, drivers won’t have an option when it comes to liability coverage.

Since your automobile could cause physical or material harm to others, you’ll generally be expected to carry enough insurance to cover those potential costs or, in some states, provide proof of financial responsibility.

What Is Liability Car Insurance?

If you’re found at fault — or “liable” — for an accident, liability insurance helps pay the other driver’s expenses.

There are several other types of car insurance coverage available to drivers, so it’s easy to get them confused. Collision coverage, for example, pays to repair damage to your own car after an accident. And comprehensive coverage helps pay for damage to your car that’s caused by other factors, such as hail, a fire, or theft.

Auto liability insurance is all about the other guy. It’s not there to cover your costs or the costs of anyone who was riding in your car when the accident occurred.

Recommended: How Much Auto Insurance Do I Really Need?

What Does Liability Insurance Cover?

In general, there are two types of liability insurance offered on most standard policies:

Bodily Injury

This type of liability coverage protects the at-fault driver by paying for the other person’s emergency and continuing medical expenses related to the accident. It also might cover loss of income or funeral costs, or legal fees if there’s a lawsuit.

Property Damage

Property damage liability coverage helps pay for repairs to the other person’s car or other property (their home, a business, a fence, a bicycle, etc.) when the policyholder causes an accident.

Are There Limits on What an Insurer Will Pay?

Yes. The amount an insurer will pay for a claim depends on the coverage limits a policyholder chooses. Note that the amount of coverage you’re required to carry varies from state to state, and you might choose to purchase a higher level of coverage than your state mandates.

Coverage caps are usually broken down into three categories:

Bodily Injury Liability Limit Per Person

This is the maximum amount an insurer will pay out for each individual who is injured in a car accident (other than the at-fault driver who is the policyholder).

Bodily Injury Liability Limit Per Accident

This is the maximum amount an insurer will pay overall for medical expenses if multiple people are hurt in an accident. Again, it does not include medical costs for the at-fault policyholder.

Property Damage Liability Limit

This is the maximum amount an insurer will pay to repair any damage a policyholder caused to another person’s property. Any amount over that limit will likely be the responsibility of the policyholder.

How Much Liability Insurance Should a Driver Have?

You cannot buy less than the minimum amount of liability insurance your state legally requires. But some states require significantly less coverage than others.

For example, the minimum liability insurance requirements in California are $30,000 for injury/death to one person, $60,000 for injury/death to more than one person, and $15,000 for damage to property.

But the minimum requirements in Maine are more than twice those amounts: $50,000 per person for bodily injury, $100,000 per accident for bodily injury, and $25,000 for property damage. (A combined single limit of $125,000 will also satisfy the minimum limit requirement in Maine.)

General recommendations from the insurance industry suggest consumers purchase at least $100,000 of bodily injury liability per person and $300,000 per accident.

Keep in mind that when you’re shopping, you may not be able to choose standalone limits for each category of liability coverage. Most insurers set their coverage limits as part of a package, and you may have to make your purchase from those pre-established plans.

For example, a 25/50/10 policy would set the bodily injury limit per person at $25,000, the bodily injury limit per accident at $50,000, and the property damage limit at $10,000. Any costs that exceed those set amounts would be the responsibility of the policyholder.

Some people also consider purchasing an “umbrella” policy that would cover any excess costs if liability limits are exhausted. This type of policy can help protect you from large liability claims or judgments if you’re sued. And your umbrella policy may cover you as well as other members of your family or household.

According to the Insurance Information Institute, the average cost of a claim after a private passenger car accident in 2022 was $26,501 for bodily injury and $6,551 in property damage. But a claim could go much higher, if there are multiple victims, for example, or if there are serious injuries or someone is killed.

Recommended: How to Lower Car Insurance

What’s the Difference Between Full Coverage and Liability Only?

An auto insurance policy that includes liability, collision, and comprehensive coverage is sometimes called “full coverage,” because it covers both your costs and the costs of others involved in an accident.

Most states require liability coverage. But if your car is paid off, your state may not require collision (which helps to repair or replace a car that’s damaged in an accident) or comprehensive (which pays if the car is stolen or damaged by fire, vandalism or some other non-collision scenario).

And if your car isn’t worth much, you might decide to forgo one or both when purchasing car insurance. If your car is financed, however, the lender could require full coverage even if the state doesn’t.

Some states also may require other types of coverage:

•   Uninsured motorist and underinsured motorist coverage can help cover your medical expenses if you’re in an accident with a driver who has little or no insurance.

•   Uninsured motorist property damage coverage can help repair damage to your car if you are hit by an uninsured motorist.

•   Personal Injury Protection (PIP) and/or Medical Payments (MedPay) can offer protection if you or your passengers are hurt or killed in an accident.

Do You Need Liability Coverage If You Live in a No-Fault State?

A dozen states have instituted “no-fault” laws for drivers. Coverage rules and limits may vary from state to state, so you should be clear on the specifics of what your state requires.

Generally, when you live in a no-fault state and you’re in a car accident, everyone involved files a bodily injury claim with their own insurance company, regardless of who was at fault. Still, every no-fault state requires some level of liability coverage.

Drivers in no-fault states also typically must have Personal Injury Protection (PIP) insurance included in their car insurance policy to cover their own potential medical bills and expenses. PIP plans cover medical expenses for the car’s driver and passengers, which can include hospital bills, medication, rehabilitation, and other injury-related costs.

PIP insurance doesn’t replace bodily liability coverage in every state, and it doesn’t cover property damages. Your insurance company pays for repairs to your car if you have collision coverage. Or you may have to make a property damage claim against the at-fault driver’s insurance.

What If You Have an Accident in Another State?

Ready for a road trip? If you have an accident, your liability insurance may increase to match the minimum limits in whatever state you’re in, and in Canada. But you may want to check with your insurance company if you like to travel, especially if you have a bare-bones policy.

What’s Covered If Someone Else Is Driving Your Car?

The short answer is that the auto insurance covering the vehicle, not the person driving, is usually considered the primary insurance. So if you let someone else drive your car and that person causes an accident, your insurance company probably would be responsible for paying the claim.

Your liability coverage wouldn’t pay the medical bills of the person driving your car or the repairs to your car, although those costs may be covered by other parts of your policy. But it likely would be your liability insurance that pays for the driver of the other car’s medical bills and property damage.

Again, state laws may affect who is responsible in this situation, so it can help to know the rules before letting someone else drive your car.

How Much Does Liability Coverage Cost?

The price you’ll pay for liability coverage could be based on several factors, including how much you buy and where you live. Your age may also play a factor — younger drivers may pay more for coverage, for instance. You can do a little online shopping to search the best rates for your area.

But a better question might be, “How much will it cost to bump up my liability insurance beyond the state-mandated minimums?” Getting twice as much coverage won’t necessarily cost twice as much. If the price fits your budget, you may want to consider carrying more coverage than the law requires.

Upping coverage might increase your comfort level, considering the expenses that might be involved in a major accident, even if you have insurance. The extra coverage may cost more, but if you’re a safe driver you may qualify for better rates. You can research car insurance online and compare quotes to find one that fits your budget.

The extra coverage may cost more, but if you’re a safe driver you may qualify for better rates.

The Takeaway

If you’re held responsible for a car accident, liability insurance will help pay the expenses of the others involved. Most states mandate this coverage, including “no-fault” states. But the amount of coverage you must carry may vary from state to state, so when you’re researching automobile insurance, it can be useful to know your state’s rules. Shopping around for insurance in your area can help you figure out how much coverage you really need and what your premium might be.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPRO-Q225-028

Most businesses report information to the credit bureaus every 30 to 45 days. Each on-time payment you make may barely affect your score, while a missed payment can have a significant effect.

But how often does your credit score update? Let’s find that answer, and learn how to keep an eye on your credit history and credit score.

When Do Credit Reports Update?

Whenever consumers take some sort of action relating to their credit, their score — usually a number between 300 and 850 — will fluctuate.

For instance, if they apply for a loan or miss a credit card payment, their score could change.

There is no set date for a credit score update because a lender or creditor may send information to the three main credit bureaus at different times: Experian one day, Equifax five days after that, and TransUnion a week later.
An update, though, will occur at least every 45 days.

Rather than constantly checking for updates, you might want to focus on long-term goals that can help you build credit, like paying off debt, always sending payments on time, and ensuring that your scores are going in an upward direction.

Need help managing your finances? With an online budget planner, you can set budgets, organize spending, and spot upcoming bills.

Recommended: Which Credit Bureau Is Used Most?

What Is a Good Credit Score?

Lenders most often use FICO® Score, but the credit bureaus introduced the VantageScore® in 2006 to provide a score that was more consistent among the three credit agencies.

This is how the FICO Score and the latest VantageScore models break down:

People with high scores typically have access to higher lines of credit and lower interest rates. Those with low credit scores may not be approved for certain credit cards and loans. And if approved for, say, a mortgage, they will usually pay a much higher mortgage interest rate.

How to Check a Credit Report

Under federal law, consumers are entitled to one free copy of their credit report every week from each of the main credit reporting agencies: TransUnion, Experian, and Equifax.

AnnualCreditReport.com is the only authorized website for free credit reports, according to the Federal Trade Commission.
Consumers can also call 1-877-322-8228 and provide their name, address, Social Security number, and date of birth to verify their identity.

If you want to check your credit history more frequently, you can ask one or all three credit reporting bureaus for another copy. They may charge you a small fee for the service.

Why check your credit report periodically? Mainly:

•   To make sure the information is accurate and up to date before you apply for a home or car loan, buy insurance, or apply for a job.

•   To help guard against identity theft.

Recommended: How to Read A Credit Report

How to Check a Credit Score

The free credit reports do not include your credit score — or more accurately, scores. Your credit score from each of the credit bureaus will vary based on the information each has. Lenders also use slightly different credit scores for different kinds of loans.

How to get your credit scores then? Here are a few ways:

•   Buy a score directly from the credit reporting companies or from MyFICO.com.

•   Look at a loan statement or a credit card statement. Some financial companies provide credit scores for customers as a perk.

•   Use a credit score checker. Some services give consumers access to their credit scores but charge for premium services like checking a score daily. Other sites may require that you sign up for a credit monitoring service with a monthly subscription fee in order to get your “free” score.

•   Sign up for a money tracker app like the one from SoFi. It provides free weekly updates on your credit score and tracks all of your money in one place.

When signing up for credit score checking websites, it’s important for consumers to look at the terms of service and ensure they’re not being charged for premium services they do not want.

Also, it’s best to avoid an “educational” credit score vs. a score that a lender would use. For some, there will be a meaningful difference, according to the Consumer Financial Protection Bureau.

What Makes Up a Credit Score?

Learning about what factors make up a credit score can help consumers raise their scores. Main factors that contribute to the score include:

Payment History

Payment history is the most important factor when calculating a score, so it’s critical to always repay debts on time.

Credit Utilization

The credit utilization ratio is the amount that is owed in relation to how much credit a person has overall. Keeping your credit utilization ratio below 30% is commonly recommended.

Length of Credit History

For the length of the credit history, consumers can increase their score by not closing cards. The longer someone’s credit history is, the better.

New Credit

Applying for a new credit card and loan that requires a hard inquiry could ding your credit score. But rest assured, the drop is temporary. It’s multiple hard inquiries on a credit report in a short period that can cause damage. Then again, if someone is shopping for a mortgage or auto loan, both FICO and VantageScore account for multiple hard inquiries in a grace period of 14 to 45 days.

Credit Mix

Credit mix refers to credit cards, student loans, auto loans, personal loans, and mortgages. By having a mix, consumers show that they can manage all kinds of debt.

Why Credit Scores Matter

Having a high credit score can help consumers in a number of scenarios. For starters, it can help consumers qualify for better interest rates, which in turn can lower the cost of borrowing.

Consumers with a strong credit score can often reach their financial goals quicker and utilize better products. For example, they may get approved for a credit card that offers perks like bonus travel rewards or cash-back rewards. They might also be able to use a card with a 0% introductory APR or 0% balance transfer rate for a certain period.

But the benefits extend beyond borrowing. People with a high score may be able to rent a better apartment or home since landlords often check prospective tenants’ credit. They may also gain access to better car insurance rates and be able to avoid paying deposits to utility companies and cellphone providers.

The Takeaway

How often does your credit score update? All the time, really, but once every 30 to 45 days is a good barometer. While it can be tempting to constantly check your score — especially if you’re getting ready to make a major purchase — you may instead want to focus on strategies that build up your credit. Some steps include paying bills on time, paying down revolving debt, and keeping older accounts open.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL-Q225-012

Up to 100 million Americans struggle with medical debt in 2025, according to the White House. What’s more, health insurance costs, which can help control medical costs, are getting more expensive: The price went up 7% year over year in 2025, and 6% the year prior.

If you’re facing financial challenges due to medical debt, learn some options here.

How Much Do Americans Spend on Healthcare Each Year?

Many people receive health insurance through an employer. And even though employers generally help pay for a portion of the costs, the financial burden can still be significant. A typical household spends $513 per month — or $6,159 per year — on healthcare expenses, according to the U.S. Bureau of Labor Statistics Consumer Expenditure Survey. This includes routine things such as health insurance costs, doctor’s visits, medications, and medical supplies. That reflects an uptick of 7.3% year over year.

How Many Americans Struggle With Medical Debt?

Despite employer-sponsored health plans covering some of the costs, some Americans struggle to pay their medical bills.

In fact, estimates as of early 2025 range as high as 100 million Americans — or almost one in three people — struggling with medical debt. Other surveys say the number is closer to 20 million, which is still quite a high number.

Lower-income earners, Black Americans, those with chronic illnesses, and those between ages 35 and 64 typically have the most debt. As you might guess, medical debt can increase with age.

What Happens If Medical Debt Is Not Paid?

Even if you’re facing an overwhelming amount of medical debt, the worst thing to do is ignore it because you don’t have the cash in your bank account. Depending on the state where you live, a medical provider might charge you a late fee for bills not paid on time and may even charge interest if payments aren’t made at all.

After a few months, if medical bills go unpaid, the provider might choose to pass the debt over to a debt collection agency.

If the medical provider does decide to give the debt to a debt collection agency, the debt might immediately appear on the debtor’s credit report and affect their credit score. The debt collector will take steps to collect the bill. If the debt is not collected, the provider may take it even further and take legal action.

While U.S. laws don’t allow debtors to be imprisoned for unpaid debts, they could face another consequence, such as wage garnishment. If the case goes to court and a judge rules in favor of the medical service provider, there’s a chance the debtor’s wages could be garnished. In simple terms, this means that payment will be taken out of their paycheck and sent to the provider. This means less money will turn up in your checking account and can make paying bills more challenging.

4 Medical Debt Relief Options

While there are no one-size-fits-all solutions to help ease the financial burden of medical debt, the following tips for paying off outstanding debt may be worth considering. It’s also a smart move to contact a professional before taking any action.

1. Medical Debt Payment Plans

Because healthcare services are often costly, contacting medical providers to ask if they offer payment plans might be one plan of action to consider. Some medical providers may offer payment plans to pay off debt in installments instead of paying it off all at once, which might make the debt more manageable.

2. Negotiating Medical Debt

It may feel counterintuitive or inappropriate to negotiate medical bills, but some providers actually expect it. While it may seem awkward at first, negotiating medical bills can help make them more manageable. Additionally, negotiating may even help avoid a credit score ding, or worse, getting sued.

For starters, reaching out to the provider’s billing department directly to see if negotiation of medical debt is possible might be an option. Many providers have financial departments that can determine if patients qualify for discounts or reductions. Remember, when negotiating, try to be as polite as possible. But it can be helpful to be persistent, too.

Another point to remember is that providers may favor cash. So those who can afford to make a lump sum payment might consider asking if the provider offers a discount for a cash payment.

Recommended: What Is Considered a Bad Credit Score?

3. Working With a Nonprofit Advocate

If the medical bills keep piling up, it may be worthwhile to consider finding a nonprofit advocate or reputable credit counseling organization that offers assistance with managing money and debts, creating a budget, and providing resources to help consumers pay off the debt that’s dogging them.

Certified counselors that have been trained to help individuals create a plan to solve financial concerns can be found through the U.S. Department of Justice. These organizations offer counseling and debt management plans and services.

One solution credit counselors may suggest is a debt management plan. These plans may help the borrowers get their debt under control.

With one type of debt management plan, the borrower makes a lump sum payment to the credit organization, and then the organization pays the creditor in installment payments. If you decide to go this route, make sure not to confuse a credit counseling nonprofit organization with a debt settlement company.

In contrast to credit counseling nonprofits, debt settlement companies are profit-driven. They negotiate with creditors to reduce the debt owed and accept a settlement — a lump sum — that’s less than the original debt. However, these companies can charge a 15% to 25% fee on top of the debt settled. While some of these companies are legitimate, consumers are cautioned to be wary of scams.

Some deceptive practices include guarantees that all of a person’s debts will be settled for a small amount of money, that debtors should stop paying their debts without explaining the consequences of such actions, or collection of fees for services before reviewing a person’s financial situation. Researching a company’s reputation can be done through the state attorney general’s office or the state consumer protection agency.

4. Using a Personal Loan

Using a credit card to pay off medical bills doesn’t help anything when you’re trying to reduce your overall debt. Taking out a personal loan could be a way to streamline multiple bills into one monthly payment.

Consolidating medical debt might include a number of benefits. It could help you get a fixed monthly payment and, potentially, reduced interest rates.

It’s important to compare rates and understand how a new loan could pay off in the long run. If your monthly payment is lower because the loan term is longer, for example, it might not be a good strategy, because it means you may be making more interest payments and therefore paying more over the life of the loan.

Recommended: Emergency Fund Calculator

The Takeaway

If you’re steeped in medical bills, you’re hardly alone. While dealing with the debt may not be pleasant, it’s a task you shouldn’t ignore. Otherwise, you may end up with your credit score being negatively impacted or your debt being passed along to a collections agency.

Fortunately, there are some debt relief options you may want to consider. Examples include exploring debt payment plans, negotiating the debt with your provider, enlisting the help of a nonprofit advocate, or taking out a personal loan to help pay off the bills. Having the right banking partner, such as one with favorable interest rates and low or no fees, can be a smart move too.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Is there debt forgiveness for medical bills?

Some hospitals offer debt forgiveness, or what may be called charity care, for certain patients.

How can you handle medical bills you can’t afford?

Options can include negotiating your bill, requesting a payment plan, working with an advocate, looking into debt repayment plans, or taking out a personal loan.

Can you negotiate medical bills after insurance?

Yes, it is a common practice for patients to negotiate the remaining balance after insurance with their healthcare provider’s billing office. Politely explaining your situation and asking for discounts or an accommodation is a path to consider.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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SOBNK-Q225-017

A bull call spread, also known as a long call spread or a type of vertical spread, is an options trading strategy used to capitalize on moderate price increases for a stock. The strategy involves buying a call option at a lower strike price and selling a call option at a higher strike price.

Investors use a bull call spread when they’d like to take advantage of a slightly bullish trend in a stock without taking too much risk. This type of options trading strategy limits both profits and losses, making it a popular strategy for investors with limited capital and a desire for downside protection.

What Is a Bull Call Spread Position?

To initiate a bull call spread, options traders buy a call option at a lower strike price while selling a call with a higher strike price. Both options have the same expiration date and underlying asset.

This options strategy establishes a net debit or cost and makes money when the underlying stock rises in price. The potential profits hit a limit when the stock price rallies above the strike price of the short call (the leg sold with the higher strike price), while potential losses hit a limit if the stock price declines beneath the strike price of the long call (the leg bought with the lower strike price).

In a bull call spread, a trader cannot lose more than the net premium, plus commissions. A trader’s maximum gain is the difference between the strike prices of the short and long call minus the net premium, plus commissions.

Recommended: How to Sell Options for Premium

Bull Call Spread Example

Let’s say a trader establishes a bull call spread by purchasing a call option for a premium of $10 (the long call). The call option has a strike price of $50 and expires in three months. The trader also sells (or writes) a call option for a premium of $2 (the short call). The call option has a strike price of $70 and expires in three months. The underlying asset of both options is the same and currently trades at $50.

Since options contracts typically cover 100 shares, the trader’s total net cost would be $8 per share x 100 shares, or $800.

Assume that three months have passed and the expiration date has arrived.

Scenario 1: Maximum Profit

If the stock price is $60 or above at expiration, both calls would be in-the-money. The maximum gain can be determined by subtracting the net premium paid for the options from the difference between the two strike prices. In this example, the maximum profit for the trader would be $1,200, minus any commissions or fees.

•   Strike price difference: $70 – $50 = $20 per share

•   Less net premium paid: $20 – $8 = $12 per share

•   Total max profit: $12 x 100 = $1,200

Scenario 2: Maximum Loss

If the stock price is $50 or lower at expiration, both options expire worthless. The maximum potential loss would be the net premium paid upfront, plus any commissions or fees.

•   The trader loses the entire initial $8 per share investment

•   Max loss = $8 x 100 shares = $800

Scenario 3: Breakeven Price

The breakeven occurs when the total gain offsets the initial cost, which can be determined by adding the net premium ($8) to the long call strike price ($50), which results in a breakeven price of $58.

•   Long call gains = (Stock price – $50) x 100

•   Breakeven price = $50 + $8 = $58

Variables Impacting a Bull Call Spread

As with any options trading strategy, various potential factors can have an effect on how the trade will play out. The ideal market forecast for a bull call spread is “modestly bullish,” or that the underlying asset’s price will gradually increase.

As with all options, the price of the underlying security is only one of several factors that can impact the trade.

Stock Price Change

A bull call spread will increase in value as its underlying stock price rises and decline in value as the stock price falls. This kind of position is referred to as having a “net positive delta.”

Delta estimates how much the price of an option is expected to change for every $1 change in the underlying security’s price. The change in option price is usually less than that of the stock price. For example, if the stock price falls by $1, the option may only fall by $0.50.

Change in Volatility

Volatility refers to how much a stock price fluctuates in percentage terms. Implied volatility (IV) is a factor in options pricing. When volatility rises, option prices often rise if other factors remain unchanged.

Because a bull call spread consists of one short call and one long call, the price of this position changes little when volatility changes (an exception may be when higher strike prices carry higher volatility). In options vocabulary, this is called having a “near-zero vega.” Vega is an estimation of how much an option price could change with a change in volatility, assuming all other factors remain constant.

Time

Time is another important variable that influences the price of an option. As expiration approaches, an option’s total value decreases, a process called time decay.

The sensitivity to time decay in a bull call spread depends on where the stock price is in relation to the strike prices of the spread. If the stock price is near or below the strike price of the long call (lower strike), then the price of the bull call spread declines (and loses money) as time passes. Conversely, if the stock price is above the higher strike price, time decay works in favor of the trader, as the short call loses value faster than the long call.

On the other hand, if the price of the underlying stock is near or above the strike price of the short call (higher strike), then the price of a bull call spread rises (and makes money) as time passes. This occurs because the short call loses time value faster than the long call, which benefits the trader. The long call is deep in-the-money, and therefore primarily composed of intrinsic value (and less affected by time decay).

In the event that the stock price is halfway between both strike prices, time decay will have little impact on the price of a bull call spread. In this scenario, both call options decay at more or less the same rate.

Risk of Early Assignment

Traders holding American-style options can exercise them on any trading day up to the expiration date. Those who hold short stock options have no control over when they may have to fulfill the obligation of the contract.

The long call in a bull call spread doesn’t face early assignment risk, but the short call may be subject to the risk of early assignment. Calls that are in-the-money and have less time value than the dividends that a stock pays are likely to be assigned early.

This can happen because when the dividend payout is greater than the price of the option, traders would rather hold the stock and receive the dividend. For this reason, early assignment of call options usually happens the day before the ex-dividend date of the underlying stock (the day by which investors must hold the stock in order to receive the dividend payout).

When the stock price of a bull call spread is above the strike price of the short call (the call with a higher strike price), traders must determine the likelihood that their option could be assigned early. If it looks like early assignment is likely, and a short stock position is not desirable, then a trader must take action.

There are two ways to do away with the risk of early assignment. Traders can either:

•   Close the entire spread by buying the short call to close and selling the long call to close, or

•   Buy to close the short call and leave the long call open.

Pros and Cons of Using a Bull Call Spread

The main advantages of using a bull call spread is that it costs less than buying a single call option and limits potential losses. In the earlier example, the trader would have had to pay a $1,000 premium ($10 for 100 shares) if they had only been using one call option. With a bull call spread, they only have to pay a net of $800 ($8 for 100 shares).

The potential losses are also capped. If the stock were to fall to zero, the trader would realize a loss of just $800 rather than $1,000 (if they were using only the long call option).

The biggest drawback of using a bull call spread is that it caps potential gains. In the example above, our trader only realized a maximum gain of $1,200 because of the short call option position. In the event that the stock price were to soar to $400 or higher, they would still only realize a $1,200 profit.

The Takeaway

A bull call spread is a two-leg options trading strategy that involves buying a long call and writing a short call. Traders use this strategy to try and capitalize on moderately bullish price momentum while capping both losses and gains.

As with all trades involving options, there are many variables to consider that can alter how the trade plays out.

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