Call Bear Spread

Call Bear Spread

Components

Short one call option with a low strike price and long one call option with a higher strike price.

Risk / Reward

Maximum Loss: Limited to the difference between the two strikes minus the net premium.

Maximum Gain: Limited to the net premium received for the position. I.e. the premium received for the short call minus the premium paid for the long call.

Characteristics

When to use: When you are mildly bearish on market direction.

A call bear spread is usually a credit spread. A credit spread is where the net cost of the position results in you receiving money up front for the trade. I.e. you sell one call option (receive $5) and the buy one call option ($4). The net effect is a credit of $1.

This type of spread is used when you are mildly bearish on market direction. Same idea as the Call Bull Spread but reversed - i.e. you think the market will go down but think that the cost of a short stock or long put is too expensive.

Comments (5)

Peter

November 16th, 2014 at 10:34pm

Hi Paul,

Your actual gains and losses here depend on the premiums involved in the option transactions. Let's assume the $10 call is sold for $1.50 and the $15 call is bought for $0.25.

Regardless of how low the stock trades, your maximum gain for a credit spread will be the amount of premium received for the trade; in this case $125 ($1.50 - $0.25 * 100). So, if the stock is at $9 then you will make $125, if trading at $5 you will still make $125.

Once the stock above the upper strike ($15) then the loss will be the difference between the two strike prices less the net premium received. I.e. ($15 - $10) - ($1.25) * 100 = $375.

Hard to say exactly what the loss will be with the stock at $12 without putting the numbers in a spreadsheet.

Hope this makes sense - let me know otherwise.

PAUL

November 14th, 2014 at 7:28pm

Example: I sell a $10 call and buy a $15 call. Let's suppose at expiration the stock is at $12, what happens? Now, let's say the stock is at $16 by expiry date, what happens? I guess I'm asking what are the dangers? I'm thinking of the day where we think it is going to expiry next Friday and not this one by mistake....what are the consequences?

edwardlog2

June 4th, 2012 at 5:24am

Yes it is really like a credit spread. It is all about the buying and selling and its net cost. As well as call bull spread is reversed of that. This is very nice topic you discuss. Today these strategies are very popular in the field of stock marketing...Thanks...Keep it up

Peter

February 29th, 2012 at 4:04pm

Yep, you're right, that's a good point. It would be best to put it on the put side.

Leib chai

February 29th, 2012 at 8:31am

Hi
Doesnt this spread suffer from early excercise risk unlike the put bear spread if so why utilize this spread?

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