The bear call spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go down moderately in the near term.

The bear call spread option strategy is also known as the bear call credit spread as a credit is received upon entering the trade.

 Bear Call Spread Construction Buy 1 OTM Call Sell 1 ITM Call

Bear call spreads can be implemented by buying call options of a certain strike price and selling the same number of call options of lower strike price on the same underlying security expiring in the same month.

## Limited Downside Profit

The maximum gain attainable using the bear call spread options strategy is the credit received upon entering the trade. To reach the maximum profit, the stock price needs to close below the strike price of the lower striking call sold at expiration date where both options would expire worthless.

The formula for calculating maximum profit is given below:

• Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

## Limited Upside Risk

If the stock price rise above the strike price of the higher strike call at the expiration date, then the bear call spread strategy suffers a maximum loss equals to the difference in strike price between the two options minus the original credit taken in when entering the position.

The formula for calculating maximum loss is given below:

• Max Loss = Strike Price of Long Call - Strike Price of Short Call - Net Premium Received + Commissions Paid
• Max Loss Occurs When Price of Underlying >= Strike Price of Long Call

## Breakeven Point(s)

The underlier price at which break-even is achieved for the bear call spread position can be calculated using the following formula.

• Breakeven Point = Strike Price of Short Call + Net Premium Received

Suppose XYZ stock is trading at \$37 in June. An options trader bearish on XYZ decides to enter a bear call spread position by buying a JUL 40 call for \$100 and selling a JUL 35 call for \$300 at the same time, giving him a net \$200 credit for entering this trade.

The price of XYZ stock subsequently drops to \$34 at expiration. As both options expire worthless, the options trader gets to keep the entire credit of \$200 as profit.

If the stock had rallied to \$42 instead, both calls will expire in-the-money with the JUL 40 call bought having \$200 in intrinsic value and the JUL 35 call sold having \$700 in intrinsic value. The spread would then have a net value of \$500 (the difference in strike price). Since the trader have to buy back the spread for \$500, this means that he will have a net loss of \$300 after deducting the \$200 credit he earned when he put on the spread position.

Note: While we have covered the use of this strategy with reference to stock options, the bear call spread is equally applicable using ETF options, index options as well as options on futures.

## Commissions

For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around \$10 to \$20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only \$0.15 per contract (+\$4.95 per trade).

One can enter a more aggressive bear spread position by widening the difference between the strike price of the two call options. However, this will also mean that the stock price must move downwards by a greater degree for the trader to realise the maximum profit.

## Bear Spread on a Debit

The bear call spread is a credit spread as the difference between the sale and purchase of the two options results in a net credit. For a bearish spread position that is entered with a net debit, see bear put spread.

### You May Also Like

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]

### Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]

### What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time.....[Read on...]

### Investing in Growth Stocks using LEAPSÂ® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®.... [Read on...]

### Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]

### Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]

### Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]

### Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin....[Read on...]

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.... [Read on...]

### What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]

### Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]

### Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks".... [Read on...]

### Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.... [Read on...]

#### Options Strategy Finder

Outlook on Underlying:

Profit Potential:

Loss Potential:

Credit/Debit:

No. Legs:

Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide.com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.

 General Risk Warning: The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.