Bear Call Spread

Question 1

What is a bear call spread

Answer 1

Buy a call with strike price and selling another call with a lower strike of the same expiration month.

Question 2

Is a bear call spread a net credit or debit?

Answer 2

Since the long call will cost less then the premium received for the short call, a bear call spread will always be established at a net credit.

Question 3

Expectation

Answer 3

The bear call spread is a moderately bearish position. The expectation is for the security to decrease down to or slightly below the short call’s lower strike price by expiration. Below that level the profit is capped.

Question 4

What is the maximum profit

Answer 4

The maximum downside profit for a bear call spread is limited to the net credit initially received. Maximum profit = credit received
(Underlying at/below lower strike at expiration)

Question 5

What is the maximum loss

Answer 5

Maximum upside loss is limited to the difference between the calls’ strike prices or the spread’s maximum value, less the credit initiallly received for the spread.
Maximum loss = difference in strike prices - net credit received (Underlying at/above higher strike at expiration)

Question 6

Break-Even point

Answer 6

Lower strike price + net credit received

Question 7

Effect of time decay

Answer 7

For a bear call spread, if the underlying security is closer to the higher strike of the long call, losses should increase at a faster rate as time passes. If the underlying security is closer to the lower strike of the short call, profits should increase at a faster rate with time.

Question 8

How Bearish ?

Answer 8

Most bearish: a spread sold when both calls are in-the-money
Moderately bearish: a spread bought when the underlying security is between the two strike prices.
Least bearish: a spread bought when both puts are already out-of-the-money (premarily to take advantage of time decay).