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. Bear Put Spread

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

    A bull spread is a bullish options strategy using either two ...
  3. Ratio Spread

    A ratio spread is a neutral options strategy in which an investor ...
  4. Covered Bear

    A covered bear is a trading strategy in which a short sale is ...
  5. Strike Price

    Strike price is the price at which the underlying asset of a ...
  6. Debit Spread

    A debit spread is an option strategy involving the simultaneous ...
Related Articles
  1. Trading

    Vertical Bull and Bear Credit Spreads

    This trading strategy is an excellent limited-risk strategy that can be widely used.
  2. 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.
  3. 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.
  4. Trading

    Bear Put Spreads: An Alternative to Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  5. 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.
  6. Trading

    S&P 500 Options On Futures: Profiting From Time-Value Decay

    Writing bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions.
  7. Trading

    Trade The Covered Call - Without The Stock

    The standard covered call can be used to hedge positions or generate income. This calendar spread may do so more effectively.
  8. 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 ...
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. How do I set a strike price for an option?

    Learn about the strike price of an option and how to set a strike price for call and put options depending on risk tolerance ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center