Bear Call Spread

A Bear Call Spread strategy involves selling a Call Option (Short Call) with a Strike Price closer to the current market price and buying another call that is further away (Long Call). An alternative name is a Bear Credit Spread. A Bear call spread is the opposite strategy to a Bull Put Spread, but has similar characteristics in terms of risk/reward.

Bear call Spreads benefit when the price of the Underlying instrument falls because the Short Call reduces in value and is, therefore, cheaper to buy back (and might subsequently expire at zero). Even if the price of the Underlying rises, providing the market price of the instrument remains below the Strike Price of the Short Call then it is worthless at expiry and the option seller gets to keep all of the Premium they collected when the position was opened. For this reason, Bear call Spreads are sometimes described as being partially non-directional.



See the Profit & Loss diagram of the Bear Call Spread strategy at Option Creator

Example

XYZ is currently trading at $170

Short 1 x Out Of The Money $180 Strike Call for 2.82 = $282 credit
Long 1 x Out Of The Money $190 Strike Call for 0.86 = ($86) debit

Net credit received = $196

All options expire with XYZ still trading below $180

Short 1 x $180 Strike Put is worthless = ($0)
Long 1 x $190 Strike Put is worthless = ($0)

The trader keeps the $196 credit received. This is the total amount of profit available, irrespective of whether the price had fallen any lower.

Options expire with XYZ trading above $190

Short 1 x $180 Strike Call is now worth 17.5 = ($1750) debit
Long 1 x $190 Strike Call is now worth 7 = $700 credit

The trader incurs a loss of ($1050) which is offset by the credit received of $196 to reduce the liability to ($854). This is the total amount the trader can lose.