Bear Call Spread

A bear call spread, also called a short call spread or call credit spread, sells a call at one strike and buys a call at a higher strike with the same expiration. You receive a net credit. If the underlying stays below the short strike through expiration, both calls expire and you keep the credit. The long call caps the loss if the price rallies, turning a short call's open ended risk into a known maximum. It suits neutral to bearish views, especially below resistance.

Construction#

1. Sell a call at a lower strike, usually out of the money.
2. Buy a call at a higher strike for protection.
3. Same underlying and expiration.
4. Receive a net credit.

Payoff at a glance#

Worked example#

Why choose a bear call spread#

• Defined risk instead of a naked call's open ended risk.
• Lower margin than naked calls.
• Profits in flat and falling markets, and even in slightly rising ones if price stays below the short strike.
• Benefits from time decay while out of the money. See Theta.

Choosing strikes#

• Short strike above resistance, or at around 0.15 to 0.30 delta. See Support and Resistance and Delta.
• Width: wider spreads collect more but risk more.
• Call skew: on equity indices, out of the money calls usually carry lower implied volatility than puts, so call credit spreads collect less premium than put spreads at similar distances. See Volatility Smile and Skew.

Risks specific to call spreads#

• Short squeezes and takeover news can send stocks through both strikes overnight.
• Strong bull markets can steadily grind through short call strikes.
• Early assignment before dividends: a short in the money call can be assigned the day before the ex dividend date, leaving you short shares and owing the dividend. See Early Exercise.

Managing the trade#

• Take profits at 50% to 75% of the credit.
• Exit or roll if price breaks above resistance and the short strike is threatened.
• Close before expiry if price is between the strikes.
• Watch dividend dates if the short call is in the money.

Combining with a put spread#

Selling a bear call spread above the market and a bull put spread below it creates an iron condor, which profits if price stays in a range. See Iron Condor.

Common mistakes#

• Selling call spreads on momentum stocks in strong uptrends.
• Collecting tiny credits for large risk.
• Ignoring dividends and early assignment.
• No exit plan when the short strike is breached.

Frequently asked questions#

What is a bear call spread?#

Selling a call and buying a higher strike call with the same expiry for a net credit, profiting if the underlying stays below the short strike.

What is the maximum loss on a bear call spread?#

The difference between the strikes minus the credit received, multiplied by the contract size.

What is the difference between a bear call spread and a bear put spread?#

A bear call spread is opened for a credit and profits if price stays below the short strike; a bear put spread is opened for a debit and profits if price falls.

Next, learn spreads across expiries in Calendar Spreads.