The Bear Call Spread - also called call credit spread or short call vertical spread - belongs to the category of vertical spreads and is used in case of bearish to neutral market opinion. The strategy is linked to the Short Call However, the unlimited risk potential of the sold products is not taken into account. Call option at a Bear Call Spread limited by the purchase of an additional call, which in turn leads to a lower total premium income (net credit).
Definition Bear Call Spread
A Bear Call Spread is a Option strategy, which consists of a sold call option (short call) and a purchased call option (long call) with a higher strike price.
Both options have the same expiration date. Since the long call is further out of the money than the short call, the price of the purchased option is lower than the price of the sold option and there is a premium income at the opening of the trade.
P&L diagram of a Bear Call spread
In the profit and loss diagram you can see that the Bear Call Spread has a limited profit potential, with a limited maximum loss at the same time.
What to look for when trading a Bear Call Spread?
The Bear Call Spread comes in at a bearish to neutral market opinion for use. The base prices of the options are often Out Of The Money, but can also be At The Money or In The Money, which influences the amount of premium income. The width of the spread can also be varied and influences the maximum possible profit and loss.
Maximum loss
The maximum loss occurs if the underlying is quoted above the price level of the long call (or at the same price level) on the expiration date. The amount of the loss corresponds to the Spread widthminus the option premium (net credit) collected at the opening of the trade.
Maximum loss = strike price long call - strike price short call - net credit
Maximum and realized profit
The maximum profit of the Bear Call Spread is limited to the Option premium and can be realized if both options expire worthless. This means that on the expiration date the underlying must be below the strike price of the short call note
If the underlying quotes a few points above the strike price of the short call, a small profit is generated. If the underlying rises above the break-even point, a small loss is incurred, which approaches the maximum loss the further the price rises.
If the price of the underlying security on the expiration date is between the base prices of the two options, the profit (or loss) is calculated as follows:
Profit = Net Credit - (underlying price - strike price short call)
Break Even Point
If the underlying rises above the strike price of the short call, a loss is incurred. The option premium received serves as a buffer. The break-even point can thus be calculated by taking the Option premium added to the strike price of the short call will.
Break Even Point = Strike Price Short Call + Net Credit