Bear call spread definition

A trading strategy consisted of sale and purchase of call options at different strike prices for the same underlying asset and expiration date.

Bear call spread definition                                 

What is a bear call spread?

A bear call spread is a strategy used in options trading. Traders sell a call option and, at the same time, purchase another call option for the same reference asset. The difference is that they buy a (long) call option with a higher price than the price defined in the sold (short) option. When performing the bear call spread strategy, the trader expects that the price of the underlying asset will fall down during the defined time period.

Bear call spread = short call with lower strike price + long call with a higher strike price

The maximum profit made with a bear call spread is the premium received from the sale of a call option. The bear call spread strategy has certain characteristics in terms of the maximum profit opportunity and the maximum loss potential.

Bear call spread explained

The limited profit-making potential is one of the biggest downsides to this trading strategy. The highest profit a trader can make is the premium or credit received for the short option.

Max profit = Net premium received – commissions

The maximum profit is achieved when the price of the asset is below the strike price defined in the short call option.

On the other hand, the bear call strategy also limits the potential loss for the trader. But when the price of the underlying asset is higher than the strike price of the long call option at expiration, the trader faces the maximum loss.

Maximum loss = strike price of long call – strike price of short call – net premium received + commissions paid.

Let's say a stock is trading at $50 and a trader sells a call option for stock A at a strike price of $50 and receives a premium of $2.5. At the same time, the trader buys a call option for the same stock, stock A, at a strike price of $54, and pays a premium of $1. The difference in the strike price between the options is $4, while the net premium is $1.5.

The maximum risk exposure is $4 – $1.5 or $2.5 per share (for simplicity, no commissions are calculated). The maximum loss will occur when the stock price is the same or higher than the strike price of the long call option. Profit will be made if the stock price falls below the strike price of a short option, and two options become worthless.

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