What is a 'Bear Call Spread'

A bear call spread, or a bear call credit spread, is a type of options strategy used when an options trader expects a decline in the price of the underlying asset. A bear call spread is achieved by purchasing call options at a specific strike price while also selling the same number of calls with the same expiration date, but at a lower strike price. The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade.

Also called a short call spread.

BREAKING DOWN 'Bear Call Spread'

For example, let's assume that a stock is trading at $30. An options trader can use a bear call spread by purchasing one call option contract with a strike price of $35 for $0.50 and a cost of $50 ($0.50 * 100 shares/contract) and selling one call option contract with a strike price of $30 for $2.50 or $250 ($2.50 * 100 shares/contract). In this case, the investor will earn a credit of $200 to set up this strategy ($250 - $50). If the price of the underlying asset closes below $30 upon expiration, then the investor will realize a total profit of $200 (($250 - $50) - ($35 - $30 * 100 shares/contract)).

Advantages of a Bear Call Spread

The main advantage of a bear call spread is that the net risk of the trade is reduced. Selling the call option with the higher strike price helps offset the cost of purchasing the call option with the lower strike price. Therefore, the net outlay of capital is lower than selling a single call outright. And it carries far less risk than shorting the stock or security since the maximum loss is the difference between the two strikes reduced by the amount received, or credited, when the trade is initiated. Selling a stock short theoretically has unlimited risk if the stock moves higher.

If the trader believes the underlying stock or security will fall by a limited amount between the trade date and the expiration date then a bear call spread could be an ideal play. However, if the underlying stock or security falls by a greater amount then the trader gives up the ability to claim that additional profit. It is a tradeoff between risk and potential reward that is appealing to many traders.

With the example above, the profit from the bear call spread maxes out if the underlying security closes at $30 —the lower strike price —at expiration. If it closes below $30 there will not be any additional profit. If it closes between the two strike prices there will be a reduced profit, while closing above the higher strike, $35, will result in a loss of the difference between the two strike prices reduced by the amount of the credit received at the onset.

Max profit = $200 (the credit)

Max loss = $300 (the $500 spread between the strike prices minus the initial credit)

RELATED TERMS
  1. Bull Spread

    A bull spread is a bullish options strategy using either two ...
  2. Horizontal Spread

    A horizontal spread is a simultaneous long and short derivative ...
  3. Short Leg

    Any contract in an option spread in which an individual holds ...
  4. Iron Butterfly

    An iron butterfly is a options strategy created with four options ...
  5. Short Call

    A type of strategy regarding a call option, which is a contract ...
  6. Naked Call

    A naked call is an options strategy in which the investor writes ...
Related Articles
  1. Trading

    Which Vertical Option Spread Should You Use?

    Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.
  2. Trading

    Using Options To Pay Off Debt

    We tell you about four option strategies that could provide a way to pay off your debt.
  3. Investing

    Try Southwest Airlines Options To Avoid Risks

    Learn how to take a position in Southwest Airlines' stock using option strategies that have limited or defined risk.
  4. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  5. Trading

    The Butterfly Spread

    A butterfly spread is a neutral options strategy with both limited risk and limited profit potential. The strategy involves four options contracts with the same expiration month but with three ...
  6. Trading

    Collecting Option Premium In The Grain Market

    Believe it or not, there are some great income-generating strategies that are lower in risk.
  7. Trading

    Strategies for Trading Volatility With Options (NFLX)

    These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility.
  8. Trading

    4 Popular Options Strategies for 2016

    Learn how long straddles, long strangles and vertical debit spreads can help you profit from the volatility that stock analysts expect for 2016.
  9. Trading

    Getting acquainted with options trading

    Learn about trading stock options, including some basic options trading terminology.
RELATED FAQS
  1. What is spread hedging?

    Learn about one of the most common risk-management strategies options traders use, called spread hedging, to limit exposure ... Read Answer >>
  2. What's the difference between a credit spread and a debt spread?

    Learn about debit and credit option spread strategies, how these strategies are used, and the differences between debit spreads ... Read Answer >>
  3. What is the difference between in the money and out of the money?

    Learn how the difference between in the money and out of the money options is determined by the relationship between strike ... Read Answer >>
  4. Can an Option Have a Negative Strike Price?

    When it comes to exchange traded options, an option can't have a negative strike price. Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center