A bear call spread is a vertical spread created by buying a call option (long call) at a higher strike price, and selling a call option (short call) at a lower strike price. Both the call options – long and short – must have the same expiration date. In example below, we are buying a $170 Strike Price call and selling a $150 Strike Price call. Both have the same expiration date of January 21, 2022, and the strike spread is $20 (i.e. $170 – $150).
Is Bear Call Spread a Net Debit or Net Credit spread?
A Bear Call Spread is a Net Credit spread.
Since we sell a lower strike call (which is more expensive) and buy a higher strike call (which is cheaper), on a net basis we collect money to create a bear call spread. In the example shown above, we can buy the $170 strike call for $3.60 per share (or $360 for the contract of 100 shares), and we can collect $9.40 per share (or $940 for the contract of 100 shares) for selling the $150 strike call.
On a net basis, we’ll collect $5.80 to create this bear call spread, hence it is a net credit spread.
Net credit = $5.80 per share, or $580 for the spread
What is the Maximum Profit in a Bear Call Spread?
The maximum profit in a bear call spread = Net Credit
In this case, maximum profit = $5.80 per share, or $580 for the spread.
What is the Maximum Loss in a Bear Call Spread?
The maximum loss in a bear call spread = Strike Spread – Net Credit
In this case, maximum loss = $20 – $5.80 = $14.20 per share, or $1,420 for the spread.
What is the Breakeven Point of a Bear Call Spread?
The breakeven point of a bear call spread = Lower Strike Price (i.e. of Short Call) + Net Credit
In this case, breakeven point = $150 + $5.80 = $155.80.
Bear Call Spread – Zones of Profit and Loss
Both the maximum profit and maximum loss are observed between the higher and lower strike prices of the bear call spread. The maximum profit is capped at the point when the stock price reaches the lower strike price. The maximum loss is contained at the point when the stock price rises to the higher strike price. There is one breakeven point and (mostly) it lies in between the two strike prices.
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