option-info and options-graphs sites:
Call , 1 strike down to ATM strike
Bear Call Spread, Bear Call Vertical
Outlook: Very bearish. The stock must fall just to breakeven. The
stock must fall more to show a gain.
buy Call ATM and sell Call ITM.
when: stock falls below the breakeven point.
Gain: Initial credit.
when: stock rises, does not fall, or does not fall enough.
Loss : limited to the difference in strike prices - the initial credit.
Calculation: Short Call strike + initial credit.
compared to short stock: limited risk, less capital needed, greater
compared to short stock: gains are limited to the downside if stock
falls below the sold strike.
after entry, increasing implied volatility is positive if the stock
rises, but negative if the stock falls. Since you are bearish (you expect
the stock to fall), the best time for entry is when volatility is high,
so that a return to normal (lower) volatility helps the strategy.
after entry, the passage of time is positive if the stock falls,
but negative if the stock rises.
Requirement: The difference in strike prices x the number of shares
represented, less the initial credit.
see the Vertical Spread Strategies page and
Bear Call credit spread
Equivalent: Short Stock plus Short Put OTM plus Long Call ATM.
Bear Call can be used if you are very bearish on a stock, but want to
receive a credit for entry instead of buying an ATM Long Put. This is
especially true if the options have a higher-than normal IV. Just buying
a long put puts you at a disadvantage in terms of the higher price caused
by the higher IV. Selling some high IV with the Bear Call levels the
- The strategy
has limited profit potential to the downside, so you don't want to be
- A situation
that might fit this Bear Call strategy is one in which a stock has just
started to fall, and stock holders are starting to get fearful and are
therefore buying puts, which will increase the IV. If you expect a further
drop in the stock, the strategy can benefit from a further drop in stock
prices, but not "too much", so the IV stabilizes or returns
to normal levels.
this is a very bearish position, the trader is expecting the stock to
fall. If the stock does not fall, the trader would be wise to cut his
losses short. If the stock stays above the breakeven point and the time
to expiration drops to just a couple weeks, you can see from the option
graph that the loss will be less than the maximum, and it is probably
best to take it. Just sitting and waiting could likely result in the
- 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.
a Bear Call near the expiration date depends on the current stock price:
the stock is below the short strike, both options will expire worthless
and you don't need to do anything.
the stock is above the short strike and the time value of the short
call drops to .05 or .10, you should trade out of the short call,
otherwise you risk being "called out" of shares you don't
the stock is above both strikes you should close out both calls.
- It is
possible to roll the entire bear call to lower strike prices if the
stock drops, but that really amounts to taking a gain on one trade and
- It is
possible to roll the entire bear call to higher strike prices if the
stock rises, but that really amounts to taking a loss on one trade and
opening another. Plus, you are entering another bearish strategy yet
the stock is acting bullishly.
- 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, with the same or lower strike
prices, if you are still bearish on the stock.