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. Purchasing the call option with the higher strike price helps offset the risk of selling the call option with the lower strike price. 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. Bear Put Spread

    A bear put spread is a bearish options strategy used to profit ...
  2. Buy A Spread

    Buying a spread is an options strategy involving buying and selling ...
  3. Bull Call Spread

    A bull call spread is used when a moderate rise in the underlying ...
  4. Strike Price

    Strike price is the price at which the underlying asset of a ...
  5. Christmas Tree

    A Christmas tree is a complex options trading strategy achieved ...
  6. Far Option

    The far option in a spread trade is the option with the longer ...
Related Articles
  1. Trading

    What is a Bull Call Spread?

    A bull call spread is an option strategy that involves the purchase of a call option and the simultaneous sale of another option.
  2. 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.
  3. Trading

    What is a Bear Put Spread?

    A bear put spread entails the purchase of a put option and the simultaneous sale of another put with the same expiration but a lower strike price.
  4. Trading

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  5. Trading

    Using Options To Pay Off Debt

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

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
  7. 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 ...
  8. Trading

    Collecting Option Premium In The Grain Market

    Believe it or not, there are some great income-generating strategies that are lower in risk.
RELATED FAQS
  1. What is the difference between a covered call and a regular call?

    Learn what a call option is, what two strategies call options can be used for, and the difference between a covered call ... Read Answer >>
  2. When does one sell a put option, and when does one sell a call option?

    An investor would sell a put option if her outlook on the underlying was bullish, and would sell a call option if her outlook ... Read Answer >>
  3. Is it more advantageous to purchase a call or put option?

    Learn the advantages of put and call options to choose the right side of the contract to meet your personal investment objectives. Read Answer >>
Trading Center