Bear Call Spread


The bear call spread is used by the investor that believes the underlying will remain in a neutral or bearish trend.  This spread order is a credit spread, which means that there is a fixed return potential.  This trade also has limited risk.  This trade has two "legs" involving the purchase and sale of Call options on the same underlying, with the same expiration but different strike prices.  Let's look at an example.

An investor is neutral to bearish on BVF which is trading at $20.  The investor decides to implement a Bear Call Spread and sell 10 BVF $20 Calls @ $3 and buys 10 BVF $22.50 Calls @ $1.  The investor receives $3 for the short calls and pays out $1 for the long calls, leaving a credit of $2x10contracts100= $2,000.00 in the account.  The investor will maximize the return if BVF is trading at or below $20 at expiration as both sets of options will expire worthless leaving the credit in the account.  The risk on this type of trade occurs if the underlying asset moves to the upside.  The maximum risk on this trade is the difference in strike prices ($22.50-$20=$2.50) less the net credit received ($3-$1=$2 net credit) or in this case $2.50-$2 = $0.50x10x100=$500.00 total risk.  This trade is subject to margin, as are all credit spreads.