Bear Call Spread

A bear call spread is a combination of a short call with a low strike price and a long call with a higher strike price. Both options have the same expiration date.

Bear call spreads allow traders to establish bearish market positions and collect premium income by selling calls. If the trader feels futures prices are headed lower, he anticipates that the options contract will not be exercised. However, if he feels there is a distinct chance that futures prices will rise, he limits his risk by buying a call at a slightly higher strike price. The bear call spread has limited risk; risk is limited to the difference in strike prices minus the net credit received. Maximum profits are equal to the net credit.

Position Premium Dollar Premium Delta Sell one $20 crude oil call $1.17 $1,170 -.52 Buy one $22 call - Net crebit $0.50 $0.67 $500 $670 +.28 -.23 Maximum risk $1.33 per barrel $1,330 per position Maximum profit $0.67 per barrel $670 per position Break-even futures price $20.67 Position Premium Dollar Premium Delta Sell one $260 gold call $6.70 $670 -.50 Buy one $280 call - Net credit $1.10 $5.60 $110 $560 +.15 -.35 Maximum risk $14.40 per ounce $1,440 per position Maximum profit $5.60 per ounce $560 per position Break-even futures price $265.60