Bear call spread — clear, compact explainer
Definition
– A bear call spread (also called a bear call credit spread or short call spread) is an options position constructed by selling (writing) one call option and buying another call option on the same underlying asset, with the same expiration date but a higher strike price. The trade is initiated for a net credit and is used when the trader expects the underlying price to stay below the sold call’s strike or decline modestly.
Key terms (defined)
– Call option: a contract that gives its buyer the right, but not the obligation, to buy the underlying at a specified strike price before or at expiration.
– Strike price: the price at which the option buyer can buy (call) or sell (put) the underlying.
– Net credit: premium received when the short call premium exceeds the long call premium.
– Contract multiplier: typically 100 for U.S. equity options (one contract controls 100 shares).
How the strategy is built (mechanics)
1. Sell one call option with a lower strike (short call).
2. Buy one call option with a higher strike (long call) and the same expiration.
3. Receive a net premium (credit) when the trade is opened because the short call premium is larger than the long call premium.
4. The purchased call caps the maximum loss from the sold call, limiting downside risk compared with an uncovered (naked) short call.
Math — formulas you can use
– Net credit per contract = Premium received from short call − Premium paid for long call.
– Maximum profit per contract = Net credit × contract multiplier.
– Maximum loss per contract = [(Higher strike − Lower strike) × contract multiplier] − Maximum profit.
– Breakeven price at expiration = Lower (short) strike + (Net credit per share).
Outcomes at expiration (summary)
– If underlying price ≤ short strike: both calls expire worthless; you keep the full net credit (maximum profit).
– If underlying price between short and long strike: you incur a partial loss; formula: (Underlying price − short strike) × multiplier − net credit.
– If underlying price ≥ long strike: both calls are in-the-money; maximum loss occurs and equals the difference in strikes times multiplier minus the net credit.
Practical step-by-step checklist (before placing the trade)
1. Confirm you have sufficient options trading level and margin capacity with your broker.
2. Choose expiration consistent with your time horizon (near-term if you expect the move soon; further out if you expect a gradual move).
3. Select a short-call strike above the current price at a level you believe the underlying will stay below.
4. Choose a long-call strike higher than the short strike to cap risk; the distance between strikes determines maximum loss.
5. Calculate net credit, breakeven, max profit, and max loss using the formulas above.
6. Check transaction costs and assignment risk (American-style options can be assigned before expiration).
7. Place the trade as a defined spread order to ensure both legs fill together where possible.
Worked numeric example
Assumptions:
– Underlying stock current price = $30.
– Contract multiplier = 100 shares per contract.
Trade:
– Sell 1 call with strike $35, receive $2.50 premium → $2.50 × 100 = $250 received.
– Buy 1 call with strike $40, pay $0.50 premium → $0.50 × 100 = $50 paid.
– Net credit = $250 − $50 = $200 (or $2.00 per share).
Calculations:
– Maximum profit = Net credit = $200.
– Maximum loss = (Difference in strikes × 100) − Net credit = (($40 − $35) × 100) − $200 = $500 − $200 = $300.
– Breakeven at expiration = Short strike + net credit per share = $35 + $2.00 = $37.00.
Expiration scenarios:
– If stock ≤ $35: both calls expire worthless → you keep $200 (max profit).
– If stock = $38: short call is $3 in-the-money, long call is $0 in-the-money → loss = ($38 − $35)×100 − $200 = $300 − $200 = $100 loss.
– If stock ≥ $40: both calls exercised/assigned → loss = max loss = $300.
When to use a bear call spread (ideal scenarios)
– You expect a modest decline or no material upside in the underlying before expiration.
– You prefer a trade with limited risk rather than a naked short call or short stock position.
– You want an income-oriented position that benefits if the underlying stays below your short strike.
Benefits (why traders use it)
– Limited, known downside risk (capped by the long call).
– Upfront credit provides immediate positive cash flow.
– Less capital/margin required than naked short positions.
– Works when the market is mildly bearish or neutral.
Risks and limitations
– Profit is capped at the initial credit; you give up upside profit potential beyond that.
– If the underlying rallies above the short strike, you can incur losses up to the capped maximum.
– Risk of early assignment on the short call (particularly for American-style options when the short call is deep in-the-money before ex-dividend dates).
– Transaction costs and slippage can reduce net return.
Comparisons (short notes)
– Bear call spread vs bull call spread: Bear call spread is a credit spread constructed for neutral-to-bearish expected moves (sell lower strike, buy higher strike). A bull call spread
A bull call spread is the mirror-image debit spread used when you expect a modest rise in the underlying: you buy a lower-strike call and sell a higher-strike call. It profits from upside movement up to the short strike but costs an initial debit (net premium paid).
Other comparisons (short notes)
– Bear call spread vs bear put spread: A bear put spread uses puts (buy higher-strike put, sell lower-strike put) and is a debit spread that gains from a stronger bearish move; the bear call spread is typically cheaper to enter (credit) and is best for neutral-to-mildly-bearish views.
– Bear call spread vs covered call: A covered call involves owning the underlying and selling a call; it reduces upside and provides income but has very different capital requirements and risk profiles (covered call has unlimited upside forgone but no explicit max loss on the stock; bear call spread has defined max loss).
– Bear call spread vs naked short call: A naked short call has unlimited downside (losses if the underlying rallies), larger margin requirements, and greater assignment risk. The bear call spread caps that risk by buying the higher strike.
– Bear call spread vs iron condor: An iron condor combines a bear call spread above the market with a bull put spread below the market to create a wider-range neutral strategy; it typically yields smaller credit but profits if the underlying stays inside a range.
Worked numeric example (step-by-step)
Assumptions
– Underlying stock XYZ currently trading at $100.
– You expect mild bearish/neutral action over one month.
– Enter a bear call spread: sell 1 XYZ 105-call for $3.50, buy 1 XYZ 110-call for $1.00. All options are 100-share contracts. Ignore commissions and early assignment for this example.
Step 1 — Calculate net credit
– Premium received from short call = $3.50 × 100 = $350.
– Premium paid for long call = $1.00 × 100 = $100.
– Net credit = $350 − $100 = $250.
Step 2 — Strike width
– Strike width = 110 − 105 = $5.00 per share = $500 per contract.
Step 3 — Maximum profit
– Max profit = net credit = $250 (occurs if XYZ ≤ short strike $105 at expiration).
Step 4 — Maximum loss
– Max loss = strike width − net credit = $500 − $250 = $250. (Loss occurs if XYZ ≥ long strike $110 at expiration.)
Step 5 — Breakeven at expiration
– Breakeven price = short strike + net credit per share = $105 + ($250/100) = $107.50.
– At $107.50 the position’s P/L = 0.
Payoff checkpoints at expiration
– If XYZ ≤ $105: both calls expire worthless => profit = $250.
– If $105 < XYZ < $110: short call is in-the-money by (S − 105), long call offsets up to $5; P/L = net credit − (S − 105) × 100.
– If XYZ ≥ $110: short and long calls offset, net loss = $250.
Key formulas (per contract)
– Net credit = premium_short − premium_long.
– Max profit = net credit × contract_multiplier (normally 100).
– Max loss = (strike_width × contract_multiplier) − max_profit.
– Breakeven = short_strike + (net_credit / contract_multiplier).
Practical checklist before entering a bear call spread
1. Market view: mild bearish or neutral through expiration date.
2. Select expiration: choose a time horizon that matches your view; theta (time decay) helps the seller.
3. Choose strikes: set short strike above current price where you’re willing to bear short-term risk; wider widths increase max loss and potential profit.
4. Confirm net credit and margin: calculate premium flows and confirm margin requirement with your broker.
5. Check liquidity and spreads: prefer liquid options (tight bid-ask) to reduce slippage.
6. Plan exits: define profit target, stop-loss, and early assignment handling (especially if short call goes deep ITM).
7. Monitor dividends and earnings: events can change risk quickly and increase early assignment risk on American-style options.
Exit and risk-management guidelines
– Close/adjust if underlying moves past breakeven toward the short strike to limit potential loss.
– Consider rolling up and out (buy back short call, sell a higher strike with later expiration) to manage an adverse move, but watch additional costs and margin.
– If the position is near maximum loss, closing may be preferable to letting it expire if further adverse movement is likely.
– Watch for ex-dividend dates and very large intraday moves—these increase early-assignment likelihood on the short call.
Assumptions and caveats
– The numeric example ignores commissions, taxes, and borrowing/margin fees.
– Payoffs assume European-style expiration; American-style options introduce early-assignment risk.
– Real-world execution can differ because of bid-ask spreads, partial fills, and slippage.
Educational disclaimer
This information is educational and does not constitute individualized investment advice or recommendations. Options trading carries substantial risk and may not be suitable for all investors. Consult your broker and tax advisor before trading.
Selected references
– Investopedia — Bear Call Spread: https://www.investopedia.com/terms/b/bearcallspread.asp
– The Options Industry Council (OIC) — Options Strategies: https://www.optionseducation.org/
– Cboe (Chicago Board Options Exchange) — Options Strategy Pages: https://www.cboe.com/strategies/
– U.S. Securities and Exchange Commission — Investor Bulletin: Options: https://www.in
.gov/oiea/investor-alerts-and-bulletins/ib_options
– Options Clearing Corporation (OCC) — Education & Resources: https://www.theocc.com/education