option-info and options-graphs sites:
Call , (1
strike down to 1 strike up)
Bear Call: Spread, Vertical, Credit Spread
Outlook: Bearish. The stock must fall by some amount to show a gain.
buy Call OTM and sell Call ITM, same distance from current stock
when: stock falls.
Gain: initial credit.
when: stock rises, or does not fall.
Loss : limited to the difference in strike prices x the number of
shares represented - the initial credit.
Calculation: Short Call strike + initial credit.
compared to short stock: limited risk, less margin needed, greater
compared to short stock: gains are limited to the downside if stock
falls more than the sold strike.
after entry, increasing implied volatility is negative if the stock
falls, but positive if the stock rises.
after entry, the passage of time is positive if the stock falls,
but negative if the stock rises.
Requirement: difference in strike prices x number of shares represented.
see the Vertical Spread Strategies
page and the All Bear Call
credit spread graphs page.
Equivalent: Short Stock plus Short Put at lower strike plus Long
Call at upper strike.
Bear Call can be used if you are bearish on a stock, but want to have
a better chance of a gain than buying an ATM Long Put. The ATM Long
Put must fall by the amount of the debit, this Bear Call has a gain
with any drop in the stock price.
- The gains
are limited to the downside, so you don't want to be "too"
- Over the
range of strike prices used, the position will gain or lose a dollar
amount nearly the same as holding a short stock position.
this is a bearish position, the trader is expecting the stock to fall.
If the stock rises instead, the trader would be wise to cut his losses
short. Using the example graph, if the stock rises to about $52.50 at
any time, the loss would be about $200, and it is probably best to take
it. Just sitting and waiting could likely result in the maximum loss
of more than twice that amount.
- If the
stock falls most of the way to the sold strike, the trader should stick
with the position. As the option graph shows, just the passage of time
is a benefit at any stock price near the sold strike.
- If the
stock falls below the strike you sold by expiration, both calls will
expire worthless and you do not need to trade out of them, saving commission
- It is
not usually recommended to adjust one part of a Bear Call. If you take
a trading profit on the short calls when the stock drops for instance,
you are actually increasing your maximum risk. You might think you will
sell the calls again the next time the stock goes up, but what if it
- It is
possible to roll the entire bear call to higher strike prices if the
stock rises, but that really amounts to closing one trade at a loss
and opening another trade in hopes of a gain. Plus, the stock has not
behaved bearishly yet you are taking a second bearish position.
- Or if
the stock falls to near the sold call strike with expiration near and
you have made 80% or so of the total possible on the short calls, you
can roll everything out to the next month, and lower strike prices,
if you are still bearish on the stock.