Bear Call Spread

This is when you sell a call and buy a call with a higher strike price.

A Bear Call Spread is used when you have a bearish outlook on a stock and you want to bet against it by going short but you don't want to shirt the stock because it theoretically has unlimited risk. The Bear Call spread has limited risk since you can only lose the difference/spread between the two Call strikes minus the credit you received from the Call sale.

For example, let's say you wanted to put a Bull Call Spread on AAPL because you think it has run out of steam and could roll over. Also let's say APPL is currently trading @ 139, then to put on a Bull Call Spread you would need to:

SELL TO OPEN JUL 15th 139.00 CALL @ 3.00 &

BUY TO OPEN JUL 15th 141.00 CALL @ 2.00

In this case your maximum risk would be 1.00. We arrived at this 1.00 number by:

  1. Subtracting 139 from 141 which is 2.00 . This is the difference between the two strikes. Then...
  2. Subtracting the premium you paid for the Call i.e 2.00 from the Credit you received from the sale of the short leg i.e 3.00. The result here is 3.00-2.00 =1.00. Then...
  3. Subtracting the final credit (1.00) from the difference between the strikes (2.00). So your max risk is 2.00-1.00= 1.00