Bear Call Spread Introduction
Definition - Credit Spread Position
Bear Call Spread Example
Example - Using the CallsAndPuts.com "Bear Call Spread" Data

Option Strategy:            
Bear Call Credit Spread (Vertical Bear Calls)

Investor Sentiment:       
Moderate Bearish Strategy (Large Credit Spread): It's considered a bearish strategy because you profit if the underlying stock price decreases.

Profit Potential:             
This strategy requires the investor to buy out-of-the-money (higher) call options and sell in-the-money (lower) call options on the same stock with the same expiration date.  This is also known as a vertical bear call spread.  If the stock price closes below the in-the-money (lower) call option strike price on the expiration date, then the investor reaches maximum profits.    
     
Risks:                              
If the stock price increases above the out-of-the-money (higher) call option strike price at the expiration date, then the investor will experience maximum loss which is the difference between the two strike prices minus the net credit received when the spread was established.

Drawbacks:                    
Lower risk than strictly buying put options, but limited profit potential.  Break-even at lower strike price plus net credit.  Maximum profit potential if stock decreases below the in-the-money (lower) call option strike price.

Profit / Loss Summary:
Net Credit = Money received from selling in-the-money (ITM) call options - Money paid for buying out-of-the-money (OTM) call options
Maximum Profit Potential = Net Credit Received
Maximum Loss Potential = Difference Between Strike Prices - Net Credit Received

Bear Call Spread Introduction

The Bear Call Spread strategy requires the investor to buy out-of-the-money call options (long position) while simultaneously selling in-the-money call options (short position) on the same underlying stock.  A Bear Call Spread strategy is profitable when the stock price moves below the break-even point: lower strike price plus net credit.  A characteristic of the vertical Bear Call Spread is the call options are sold and bought on the same underlying stock with the same expiration date (this is why it's known as a "vertical spread").  CallsAndPuts.com data focuses on bear call spread plays that are vertical in nature.  The benefit of the Bear Call Spread strategy is the risk never exceeds the net investment of buying and selling call options simultaneously.  This strategy is considered moderately bearish because the investor is using the the sale of a call to reduce his/her risk while still positioning for a decent profit should the stock price move below the lower strike price.  The maximum loss potential is if the stock moves above the out-of-the-money (higher) call option strike price. 

Definition - Credit Spread Position

As previously mentioned, a Bear Call Spread is the purchase of an out-of-the-money (higher) call option while simultaneously selling the in-the money (lower) call option on the same underlying stock.  There are more aggressive and less aggressive Bear Call Spread positions, but CallsAndPuts.com data looks for plays where one call option position (leg) is in-the-money (short position) and the other leg is out-of-the-money (long position) on the same underlying stock with the same option expiration date.  Because the sale of the in-the-money (lower) strike price brings in cash flow greater than the cost of the out-of-the-money (higher) buy call option position, it is considered a "Credit Spread".  To emphasize, if a spread position takes in more through the sale of one call option position than it costs to purchase the other call option position, it is a credit spread.  If the opposite were true, that is the call purchase position costs more than the sale of the other call position, this is known as a "Debit Spread".  This is the type of position (a debit spread) you see with Bull Call Spreads and Bear Put Spreads.  A Bear Call Spread position is always considered a credit spread because the sale of the in-the-money (lower) call options takes in more than it costs to purchase the out-of-the-money (higher) call options.

Bear Call Spread Example

Let's go through an example from the CallsAndPuts.com "Bear Call Spread" data:

Stock Company Name/Ticker Symbol:                   Disney Corporation (DIS)
Stock Price:                                                             $39.875
Sold In-The-Money Call Option (Short Position):           1 contract - June $35 @ $5
Bought Out-Of-The-Money Call Option (Long Position): 1 contract - June $40 @ $1.56
Call Options Expiration Date:                                      June (The market close of the third Friday of the month)

This position is considered a net credit of $3.44, spread of $5. That is the difference between the sale of the in-the-money (lower) call option and the purchase of  the out-of-the-money (higher) call option which results in a positive cash flow of $3.44 ($5.00 - $1.56).  The spread represents the difference between the in-the-money and out-of-the-money strike prices, which are $5 apart (June $40 call option - June $35 call option).  So, what does all of this translate to for potential profit?   Let's assume the stock price is lower than the in-the-money (lower) call option strike price ($35) on the June expiration date.  That would translate to a maximum profit of the net credit we received when we established the Bear Call spread ($5.00 - $1.56) = $3.44 x 1 contract (100 shares) for a maximum profit of $344 per contract. 

Now let's look at the maximum loss potential should the stock price go above the out-of-the-money (higher) strike price on the June expiration date.  Our Bear Call Spread pre-determines the maximum amount we are willing to lose.  In our example, maximum loss potential translates to the $5.00 Call Spread - $3.44 Net Credit received = $1.56 x 1 contract (100 shares) = $156 per contract.

To summarize:

Maximum Profit Potential = Net Credit Received

Maximum Loss Potential = The Call Option Spread - Net Credit Received

Example - Using the CallsAndPuts.com "Bear Call Spread" Data

Now that we've explained the Bear Call Spread strategy, let's use the CallsAndPuts.com "Bear Call Spread" data to select an option play for an additional example: Bear Call Spread Example

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