Bear call spread stock option trading strategy

What is a bear call spread?

The Bear Call spread option trading strategy is considered a credit spread. A trader or investor may consider this strategy when he or she has a bearish view of the underlying stock. The maximum profit is the net credit received when initiating the option position.

As long as the underlying stock is below the short strike at expiration, the trader will keep the entire premium received from when the position was initiated.

The maximum loss on a Bear call spread is realized when the stock expires above the long Call's strike price.

It is important to realize that without the long call option in place, the risk would be much greater on the position. Considering all that would be left is a short call option position. Buy attaching the long call, not only is the risk greatly diminished, but your margin requirement is significantly reduced to the difference between the long and short strikes, minus the credit received from when the position was implemented.

It is also noteworthy that the passage of time has a positive effect on the Bear Call spread option position. Every day that passes by further erodes both legs of the option strategy, thereby tightening the spread which contributes to a porofitable position, the closer the underlying is to the short strike.

It is very important to realize the impact that time and volatility has on this option position. Remember time value is measured through the option Greek theta and volatility is measured through the option Greek vega. Understanding the set of stock option sensitivities known as the Greeks will make you a much more well informed trader/investor. And give you a huge advantage in understanding how equity options are priced.

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