Bear call spread

In finance, a bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying with the same expiration month.

Example

Consider an stock that costs $100 per share, with a call option with a strike price of $105 for $2 and a call option with a strike price of $95 for $7. To implement a bear call spread, one buys the $105 call option, costing $2, and sells the $95 call option, for a profit of $7. The total profit after this initial options trading phase will be $5.

After the options reach expiration, the options may be exercised. If the stock price ends at a price P below or equal to $95, neither option will be exercised and your total profit will be the $5 per share from the initial options trade.

If the stock price ends at a price P above or equal to $105, both options will be exercised and your total profit per share will be $5 from the original options trading, a loss of (P - $95) from the sold option, and a gain of (P - $105) from the bought option. Total profits will be ($5 - (P - $95) + (P - $105)) = -$5 per share (i.e. a loss of $5 per share).

References

* cite book
last = McMillan| first = Lawrence G.
title = Options as a Strategic Investment
edition = 4th ed.
publisher = New York : New York Institute of Finance
year = 2002
id = ISBN 0-7352-0197-8

External links

* [http://www.optionszone.com/trade-tip-of-the-week/tradetip20070702.html Not All Call Buying is Bullish] , OptionsZone.com