Bear Call Spread

A bear call spread (also called a bear call credit spread or short call spread) is an options strategy used when you expect a modest decline or neutral movement in an underlying asset. It involves selling a call at a lower strike and buying a call at a higher strike, both with the same expiration. The position is entered for a net credit, giving limited profit and limited loss.

Key takeaways
* Strategy type: bearish / neutral-to-bearish.
* Structure: short call at lower strike + long call at higher strike (same expiration).
* Entry: net credit (premium received > premium paid).
* Maximum profit: net credit received.
* Maximum loss: difference between strikes minus net credit.
* Breakeven at expiration: short strike + net credit (per-share basis).

How it works
* Sell one call option at strike K1 and collect premium P1.
* Buy one call option at strike K2 > K1 and pay premium P2.
* Net credit = P1 − P2.
* Contract size: typically 100 shares per option contract—multiply dollar amounts by 100 for total dollar values.

Formulas (per share)
* Net credit = premium received − premium paid.
* Max profit = net credit × contract size.
* Max loss = (K2 − K1 − net credit) × contract size.
* Breakeven = K1 + net credit.

Ideal scenarios
* You expect the underlying to decline modestly or remain below the short strike through expiration.
* You want to limit downside risk compared with shorting the stock or selling a naked call.
* You do not expect a large, rapid move downward (if you do, a bear put spread or buying puts could capture larger gains).

Benefits
* Limited risk: maximum loss is capped and known upfront.
* Lower capital requirement and risk than shorting the underlying or selling naked calls.
* Generates income via the initial net credit.
* Time decay (theta) works in your favor for the short call if the underlying stays below the short strike.

Risks and limitations
* Limited upside: maximum profit is the initial credit, so gains are capped.
* Loss if the underlying rallies above the long call’s strike; losses are limited but real.
* Early assignment risk on the short call (especially if the option is in the money before expiration).
* Requires correct selection of strikes and expiration—volatility and timing matter.
* Margin and commissions can affect net results.

Practical example
Assume the stock trades at $30.
* Sell 1 call, strike $35, receive $2.50 (premium) → $250 per contract.
* Buy 1 call, strike $40, pay $0.50 (premium) → $50 per contract.
* Net credit = $2.00 → $200 per contract.

Outcomes at expiration:
* If stock ≤ $35: both calls expire worthless. Profit = net credit = $200.
* If $35 < stock < $40: the short call is in the money and the long call is out of the money. Loss increases as the stock rises; at any price S between 35 and 40, P/L = net credit − (S − 35) × 100.
* If stock ≥ $40: both calls are in the money. Max loss = (40 − 35 − 2) × 100 = $300.

Summary of this example:
* Max profit: $200 (net credit).
* Max loss: $300 (difference between strikes minus net credit).
* Breakeven: $35 + $2 = $37.

Choosing strikes and expiration
* Short call strike (K1): choose a level you believe the underlying is unlikely to exceed by expiration.
* Long call strike (K2): typically one or a few strikes above K1 to cap risk and reduce margin.
* Spread width (K2 − K1) determines maximum loss potential.
* Expiration: match the expected time frame for the anticipated move. Shorter expirations have faster time decay and lower premium cost; longer expirations cost more and expose you to more time risk.

Comparisons
* Bear call spread vs. bull call spread: Bear call is bearish (sell lower-strike call, buy higher-strike call) and entered for a credit. Bull call is bullish (buy lower-strike call, sell higher-strike call) and entered for a debit.
* Call spread vs. put spread: Call spreads use call options; put spreads use puts. A bear put spread is an alternative bearish strategy that can be preferable if you expect a larger downward move.

Practical considerations
* Monitor leg prices and implied volatility—IV increases can widen premiums and affect P/L.
* Be prepared for early assignment on short calls, especially when in-the-money deep or just before ex-dividend dates.
* Factor commissions, fees, and the broker’s margin rules into trade sizing and risk calculations.
* Only use this strategy if it aligns with your risk tolerance, market outlook, and trading experience.

Bottom line
A bear call spread is a conservative bearish options strategy that provides income and limits downside risk at the cost of capping upside. It’s appropriate when you expect the underlying to fall modestly or stay below a chosen strike by expiration and prefer a defined-risk alternative to shorting or selling naked calls.