The bear call spread is a bearish options trading strategy that is used when the market is extremely volatile and moderately bearish. Due to the erratic movements in a bear market, an investor will in many instances, look to make moves that are profitable yet hold low risk. The bear call spread is also known as the bear credit spread.
When utilizing the bear call spread a trader sells a call option at one strike price and buys a call on the same asset, which is further out-of-the-money (at a higher strike price). In most cases, both options will have the same expiration date. The profit and loss strategy for a bear call spread is quite similar to a bear put spread; however with this technique the trader immediately receives a net premium when establishing the position. In a bear put spread, the premium is paid when the position is established. It is because of this difference that the investor already has money in hand at the inception of the bear call spread.
The bear call spread is lower risk than the bear put spread; however the profit potential is reduced as well. In a bear call spread, the risk is minimized because the investor purchases lower priced calls that provide protection if the price goes up significantly. Conversely, in a bear call spread, profit potential is limited to the premium collected for the calls sold less the cost of the premium paid for the calls that were purchased. As the name implies this strategy is used in a bearish market.
In general a bull market brings more opportunities for profitable trading. A bear market however, typically moves a trader into a more conservative approach of minimizing risks and finding trades that while lucrative are less risky. A bear call spread is a perfect example of such a conservative move to find profits.
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