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Bear Call Spread


Bear Call Spread Chart

Bear Call Spread Risk / Reward

A bear call spread is an independant trade, that uses a combination of two calls, but is still a single direction strategy. The trader buys a single call contract at any strike price, and then sells a single call contract at a lower strike price (i.e. farther in the money). The profit comes from the difference in the premiums of the two calls. If the price moves up, the calls will both go into profit, and if the price moves down, both calls will expire worthless. The trade is entered at a credit (the long call costs less than the premium received for the short call), and is therefore a credit spread strategy (i.e. the maximum profit is received upon entering the trade).

Making a Bear Call Spread

  1. Purchase a single out of the money call contract
  2. Sell a single in the money call contract
  3. Wait for the price to move below the short call strike price
  4. Let both calls expire worthless to realize the profit

Risk and Reward

As shown on the risk / reward chart (view the full size chart), the risk of a bear call spread is low, and is limited to the difference between the strike prices of the long and short calls, regardless of how far the price moves up (against the trade). The risk of a bear call spread is calculated as :

Maximum Risk = Difference between long and short call strike prices

Loss = Long call strike price - Short call strike price - Premium received (initial credit)

The reward of a bear call spread is limited to the premium received when entering the trade. The profit of a bear call spread is calculated as :

Maximum Profit = Difference between long and short call premiums

Profit = Long call premium - Short call premium (initial credit)

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