PREMIUMBear Call Spread
Overview:
The bear call spread is popular because it’s a low risk, low return strategy. The strategy is employed when a call is sold, and any higher strike call is simultaneously bought. Both options expire in the same month. The investor in a bear call spread receives the generated premium upfront.
Main Uses:
- The first reason an investor would use this strategy is if the investor is feeling neutral to bearish about the underlying stock. The investor is hoping for a down turn in the underlying stock.
- The second reason an investor would use this strategy is for risk reduction. Rather than just selling call by itself which has infinite loss potentials, the investor limits total loss to the difference in strike prices.
Profit Loss Bear Call Spread:
The below graph is a profit / loss graph of a bear call spread using the OptionsHouse P&L calculator. The current stock price is at $113.28. An in-the-money call was sold with a strike price of $108. An out-of-the-money call was bought with a strike price of $118. The break-even price is $113.44. If the stock price increases above $113.44, the investor will lose money. However; if the stock price decreases below $113.44, the investor will make money.
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