Bear Call Spread

What is a Bear Call Spread?

Definition

The bear call spread is a type of options strategy used by option traders when there are suspicions of a price decrease of a security or asset. It is also known as a bear call credit spread and a short call spread which is limited-risk and limited-reward by nature.

Other Information

A bear call spread happens when an options trader purchases call options at a particular strike price and selling all the calls with the same expiration date at a lower strike price than the purchased strike price. The option trader would receive a maximum profit equivalent to the credit received at the beginning of the trade. Bear call spreads happen by buying two call options—longs and short—at different strike prices with the same expiration date. The purpose of the short stock is to generate income while the long call is to limit risks.

An option trader can only make profit using this strategy depending on how much of the initial premium revenue gets retained before the expiration date.

Advantages of Bear Call Spread

• It reduces the net risk of a trade by buying a call option at a higher strike price which helps offset the risk of selling at a lower strike price.

• It comes in handy when the option trader suspects that there might be a fall in the price of securities within a specific period of time—the trade date and the expiration date.

• They are limited-risk and limited-reward by nature

Disadvantages of Bear Call Spread

• If the stock falls by a larger amount the trader has to give up the right to claim any additional profit.

• Limited maximum gain

• Expiration risks