Bear Call Spread: Bearish Credit Strategy

The bear call spread is a credit spread strategy that profits from bearish or neutral price action. By selling a call spread, you collect premium upfront and benefit from time decay while waiting for the stock to stay below your strike. This guide teaches you how to trade bear call spreads effectively.

What is a Bear Call Spread?

A bear call spread is a vertical credit spread that involves selling a call option at a lower strike price and simultaneously buying a call option at a higher strike price. Both options share the same expiration date. Because the call you sell is worth more than the call you buy, you receive a net credit when entering the trade.

How to Construct a Bear Call Spread

Setting up a bear call spread requires two simultaneous transactions:

• Sell to open: Sell a call at a lower strike price (your resistance level)
• Buy to open: Buy a call at a higher strike price (for protection against unlimited loss)
• Both options must have the same expiration date
• You receive a net credit that is your maximum profit

Profit and Loss Calculations

Understanding your risk and reward profile:

Maximum Profit

Maximum profit occurs when the stock closes at or below the short call strike at expiration. Both calls expire worthless, and you keep the entire credit:

• Max Profit = Net Credit Received

In our example, this is $3.50 per share or $350 per contract.

Maximum Loss

Maximum loss occurs when the stock closes at or above the long call strike at expiration:

• Max Loss = (Long Strike - Short Strike) - Net Credit Received

Using our example: ($560 - $550) - $3.50 = $6.50 per share or $650 per contract.

Breakeven Point

The breakeven is where you neither make nor lose money:

• Breakeven = Short Call Strike + Net Credit Received

In our example: $550 + $3.50 = $553.50. The stock can rise $33.50 before you start losing money.

When to Use a Bear Call Spread

Bear call spreads work best in these scenarios:

• Neutral to bearish outlook: You expect the stock to stay flat or decline
• High implied volatility: Elevated IV means higher premiums to collect
• Strong resistance levels: You can identify a price ceiling the stock is unlikely to break
• Overbought conditions: Stock has rallied hard and appears extended
• After earnings rallies: When a stock has spiked and you expect mean reversion
• Income generation: You want to collect premium in a sideways or declining market

Choosing Strike Prices

Strike selection determines your probability of success:

Short Call Strike

• Close to ATM: Higher premium, higher risk, needs stock to drop or stay flat
• Far OTM: Lower premium, lower risk, high probability of success
• At resistance: Optimal balance of premium and probability

Spread Width

• Narrow ($2.50-5): Lower max loss, lower credit, higher probability
• Wide ($10-20): Higher max loss, higher credit, lower probability

Greeks and the Bear Call Spread

How Greeks affect your bearish credit position:

• Delta: Negative. You benefit when the stock falls or stays flat.
• Theta: Positive. Time decay is your friend - option premiums erode daily, which helps you.
• Vega: Negative. You benefit from declining implied volatility.
• Gamma: Negative near expiration. Rapid moves against you hurt more as expiration approaches.

Managing Your Bear Call Spread

Effective management is essential for long-term success:

Taking Profits Early

Consider closing when you have captured 50-75% of maximum profit. If you received $3.50 credit and can close for $0.85, you keep $2.65 (76%) while eliminating risk of a rally.

Cutting Losses

Set a maximum loss threshold. Common approaches:

• Close if the loss reaches 100% of credit received (paying $7.00 to close a $3.50 credit)
• Close if the stock breaks above your short strike by more than half the spread width

Rolling the Position

If the stock rallies toward your short strike, you can roll up and out:

• Close the current spread (at a loss)
• Open a new spread with higher strikes and later expiration
• Ideally collect additional credit to offset the loss and lower your breakeven

When the Stock Drops

If the stock falls significantly, the spread loses value quickly. Consider closing early to lock in profits and redeploy capital into new opportunities.

Bear Call Spread vs Bear Put Spread

Both are bearish strategies with key differences:

• Bear call spread (credit): Receive money upfront, profit from time decay, max profit if stock stays below short strike
• Bear put spread (debit): Pay to enter, need stock to drop, time works against you

Choose the bear call spread when you want income and believe the stock will not rally significantly. Choose the bear put spread when you have strong conviction the stock will fall.

Common Mistakes to Avoid

• Selling too close to the money: Higher premiums come with much higher risk of loss
• Ignoring resistance levels: Always use technical analysis to place strikes at logical levels
• Fighting strong uptrends: Bear call spreads against momentum stocks often fail
• Too short expiration: While theta is fast, recovery time is limited; 30-45 days is often optimal
• Overleveraging: Never risk more than 2-5% of your account on one spread
• Holding through earnings: Stocks can gap above strikes on positive surprises

Ideal Market Conditions

Bear call spreads perform best when:

• Implied volatility is elevated (rich premiums to collect)
• The stock is in a downtrend or consolidating below resistance
• Market sentiment is neutral to bearish
• You have identified clear resistance levels
• RSI or other indicators show overbought conditions
• The broader market is showing weakness

Bear Call Spread as Part of an Iron Condor

The bear call spread is the upper half of an iron condor. If you are neutral on a stock (not bullish or bearish), you can combine:

• Bear call spread above the current price
• Bull put spread below the current price

This creates an iron condor that profits if the stock stays in a range, collecting premium from both sides.

Summary

The bear call spread is an excellent income strategy for traders who are neutral to bearish on a stock. By selling a call and buying a higher strike call for protection, you collect premium upfront and benefit from time decay. Your maximum profit is limited to the credit received, while your maximum loss is capped at the spread width minus the credit. Focus on selling at or above resistance levels, take profits at 50-75% of maximum, and have a clear plan for managing losing positions. This strategy works best in high IV environments with 30-45 days to expiration.

Learn more: credit spreads, bull put spreads, and iron condors.