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:: Profit & Loss

Profit

The profit on a Bear Call Spread is limited to the initial credit.

 

Loss

The loss on the Spread is limited to the difference between the strike prices minus the initial credit.

 

Break Even

The break even point is the lower strike price plus the credit received.
 

 

Bear Call Spread
 
The Bear Call Spread is, like the previous spreads, a low risk, low reward strategy that would be recommended if the stock were thought to be weak. Once again, front-month options would be used.
 
:: Trading Condition
Stock Broadcom
Price $46.45
Outlook Bearish due to suspect changes in top management.
:: Alert Example
Action Sell 1 Spread
Sell $45.00 Call
Premium $2.35
Buy $50.00 Call
Premium $0.45
   
Strike Option   Debit/
Price Premium x 100 Credit
Sold Option $45.00 $2.35 $235.00 Cr
Bought Option $50.00 $0.45 $45.00 Dr
       
Credit per single spread $190.00 Cr
 
:: Margin
As with the Bull Put Spread, there will be a margin requirement for this trade, which will be $310. In considering your trading profile, you decide to put on 8 spreads, which means the amount allocated to margin in your account will be $2,480.
 
:: Profit & Brokerage

If, as anticipated, the stock moves lower, both calls will expire worthless and the entire premium will be kept as profit. This will happen if the price of the stock is at or below $45 at expiration.

 

And as with the Bull Put Spread, brokerage is only charged on entering the position, making it an attractive trade if your trading profile only allows for 1-2 spreads at a time.