Options Glossary

Glossary: Bear Call Spread

Last Updated: September 2, 2022

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Bear Call Spread

What Does Bear Call Spread Mean in Options Trading?

Bear Call Spread Payoff Diagram
A bear call spread setup involves selling one call (at or near the money) and buying one higher-strike call (further out of the money) at the same time.  Having two different strike contacts in the order creates a spread.

When selling this spread at trade entry, the trader is obligated (if the buyer exercises their contract) to sell (or sell short) the underlying shares at the strike price of the call that was sold.  The trader also has the right to buy the same shares at the purchased call’s higher strike.  By spreading the trade, the user has limited their potential losses to the difference between the two strikes.

Since the trader risks having to sell shares at a lower price than the price the trader has the right to buy the same shares, the trader is compensated for the risk by receiving a premium at the time of trade entry.  This premium is the difference between the sold call’s credit and the bought call’s cost.

The bear call spread is frequently used by beginner and seasoned options traders alike.  It is often used in combination with bull put spreads in a single portfolio to make the portfolio more neutral in it’s direction.  This bear call spread, when optimized as part of an overall strategy, allows the trader to take advantage of decaying options while limiting their risk at tradeoff of higher potential profits seen in a short call setup, which has unlimited risk and not suitable for many investors.

This setup is particularly well suited for small brokerage accounts and those with limited options trading permissions.

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