A bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration month.
When your feeling on a stock is generally negative, bear spreads are nice low risk, low reward strategies. One of the easiest way to create a bear spread is by using call options at or near the current market price of the stock.
Like bear put spreads, bear call spreads profit when the price of the underlying stock decreases. Bear call spreads are typically created by selling at-the-money calls and buying out-of-the-money calls.
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.
