Bear Call Spread

A type of options strategy used when a decline in the price of the underlying asset is expected. It is achieved by selling call options at a specific strike price while also buying the same number of calls, but at a higher strike price. The maximum profit to be gained using this strategy is equal to the difference between the price paid for the long option and the amount collected on the short option.

Investopedia Says:
For example, let's assume that a stock is trading at $30. An option investor has purchased one call option with a strike price of $35 for a premium of $0.50 and sold one call option with a strike price of $30 for a premium of $2.50. If the price of the underlying asset closes below $30 upon expiration, then the investor collects $200 (($2.50 - $0.50) * 100 shares/contract).

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In finance, a bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying with the same expiration month.

Example

Consider an arbitrary stock quoting at $100 (lot size = 100) in this month. The call option for this month for strike price of $105 is at $2 and the call option for this month for $95 is trading at $7.
The trade can buy the $105 call option (outflow of $200) and sell the $95 call option (inflow of $700). The total inflow will be $500. The trader will be profitable when the stock ends below 100.
The max loss is 105-95-5=5 per share(if the share price ends at or above 105), max profit is 5 per share. when the share price ends at or below 95.

References

• McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., New York : New York Institute of Finance. ISBN 0-7352-0197-8. 

External links

• [Not All Call Buying is Bullish], OptionsZone.com

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