What is a Bull Spread in options trading?

A bull spread in options trading is created by taking a long position in a lower strike option and a short position in a higher strike option. This strategy is designed to capitalize on a moderate increase in the price of the underlying asset. When an investor is bullish and believes that the price of the underlying asset will increase, they will buy the lower strike call option while simultaneously selling the higher strike call option.

The long position in the lower strike option allows the investor to benefit from the asset’s price increase, while the short position in the higher strike option helps to finance the purchase of the lower strike option. The maximum profit occurs when the underlying asset's price exceeds the higher strike price at expiration, allowing the investor to benefit from the difference between the two strike prices, less the cost of establishing the spread. This structure limits both potential gains and losses, making it a defined risk strategy.

The other potential answers describe different strategies or positions that do not embody the specific characteristics of a bull spread as defined in options trading parameters. Thus, the correct understanding of a bull spread directly aligns with the structure of a long position at a lower strike and a short position at a higher strike.