Bear Call Spread Strategy
A credit spread combining a short call at a lower strike with a long call at a higher strike. Collect premium upfront while limiting upside risk. Profits when the underlying stays below the short strike.
Overview
The bear call spread (also called a "credit call spread" or "short call spread") is a bearish income strategy that profits when the underlying stays flat or declines. You sell a call at a lower strike and buy a call at a higher strike, both with the same expiration, collecting a net credit upfront.
This strategy is ideal when you are moderately bearish and want to generate income with defined risk. Unlike selling naked calls, the long call caps your maximum loss if the stock rallies. Time decay works in your favor—if the stock stays below the short strike through expiration, both calls expire worthless and you keep the entire credit.
Bear call spreads are popular among income-oriented traders who want positive theta exposure with limited capital at risk on a bearish thesis. The strategy benefits from falling implied volatility after entry. Research shows that call sellers can harvest volatility risk premium, though the premium is typically smaller than for puts due to the volatility skew.
Key Insight
Bear Call Spread Payoff at Expiration
This diagram shows the profit/loss at expiration for different stock prices.You collect premium upfront and profit if the stock stays below the breakeven.
Research
Bear call spreads combine call selling (which harvests volatility risk premium) with defined risk through a protective long call. Research on vertical spreads and call overwriting strategies provides the foundation for understanding this income-focused bearish approach.
The Mathematics
In Plain English
The math behind this strategy is straightforward. Here's what you're actually doing:
- 1Sell 1 call option at strike K₂ (lower strike, typically ATM or slightly OTM)
- 2Buy 1 call option at strike K₁ (higher strike, further OTM), same expiration
- 3Receive a net credit (C) = Short call premium - Long call premium
- 4At expiration, if stock is below K₂: both calls expire worthless, keep entire credit
- 5At expiration, if stock is between K₂ and K₁: short call has value, profit decreases
- 6At expiration, if stock is above K₁: max loss reached, both calls exercised
That's it. The formulas below just express this process precisely.
1Payoff at Expiration
Where (x)⁺ = max(x, 0). The long call payoff minus short call payoff, plus the credit received. K₂ is the lower strike (short), K₁ is the higher strike (long), S_T is stock price at expiration.
2Breakeven Point
Stock price where P&L equals zero. Above this price, the position loses money. The higher your credit, the higher your breakeven.
3Maximum Profit
Maximum profit equals the net credit received. Achieved when stock closes at or below the lower strike (K₂) at expiration.
4Maximum Loss
Maximum loss is the spread width minus the credit received. Occurs when stock closes at or above the higher strike (K₁) at expiration.
Credit vs Spread WidthNote
The net credit received is always less than the spread width (K₁ - K₂). A wider spread offers more premium but also more risk. A narrower spread has less premium but higher probability of profit.
Early Assignment RiskNote
The short call may be assigned early, especially if deep ITM near ex-dividend dates. Assignment results in selling 100 shares at the strike price (short stock position). The long call provides protection to cover at a known price.
Strategy Rules
Entry Criteria
- 1Underlying has neutral to bearish outlook
- 2Implied volatility is elevated (higher premiums)
- 3Resistance level exists above the short strike
- 4No major earnings or events before expiration
- 5Sufficient liquidity in the options chain
Strike Selection
- Short call: ATM or slightly OTM (higher probability)
- Long call: 1-2 strikes above short call
- Spread width based on risk tolerance
- Target credit of 1/3 to 1/2 of spread width
- Consider delta of -0.30 to -0.40 for short call
Exit Rules
- Close at 50-75% of max profit to reduce risk
- Close if underlying breaks above short strike
- Roll up and out if challenged early
- Let expire worthless if well OTM near expiration
- Close before expiration to avoid assignment risk
Risk Management
- 1Position size: risk no more than 2-5% of portfolio per trade
- 2Set mental stop if underlying rallies significantly
- 3Avoid earnings, FDA decisions, or major announcements
- 4Monitor implied volatility for entry timing
- 5Have a plan for assignment on the short call
Implementation Guide
Implementing a bear call spread requires careful attention to strike selection, premium collection, and risk management. Follow these steps to execute the strategy properly.
Select Underlying and Assess Outlook
Choose a stock or ETF with a neutral to moderately bearish outlook. Look for clear resistance levels above the current price and avoid securities with pending binary events (earnings, FDA approvals, etc.) unless that is your explicit thesis.
- High-liquidity underlyings have tighter bid-ask spreads
- ETFs like SPY often have better fills than individual stocks
- Check the earnings calendar before entering
Analyze Implied Volatility
Bear call spreads benefit from elevated implied volatility at entry (higher premiums) and declining IV afterward. Check if current IV is above historical averages. Avoid entering when IV is at historical lows.
- Use IV percentile or IV rank to assess current levels
- Entry when IV rank > 30% often provides better premium
- Post-earnings IV crush can benefit existing positions
Select Strikes and Expiration
Choose the short call strike at or slightly above the current price (ATM to 1 strike OTM). Select the long call 1-3 strikes above. Expiration typically 30-45 days out balances time decay with risk.
- Wider spreads = more premium but more risk
- Target credit of 33-50% of spread width
- Weekly options decay faster but have gamma risk
Avoid very narrow spreads (1-strike wide) as commissions may eat into profits significantly.
Enter the Trade
Enter the spread as a single order (sell-to-open the lower strike call, buy-to-open the higher strike call). Use a limit order at the mid-price or slightly below. The order should fill for a net credit.
- Always use limit orders, never market orders
- Start at mid-price, adjust if needed
- Check that the credit meets your minimum threshold
Manage the Position
Monitor the underlying price relative to your strikes. Consider closing early at 50-75% of max profit to lock in gains and free up capital. If the underlying rallies toward your short strike, decide whether to hold, roll, or close.
- Closing at 50% profit captures most of the edge
- Rolling up and out can rescue a challenged trade
- Increase position monitoring in final week before expiration
Do not let short calls expire in-the-money unless you want assignment. Close or roll before expiration.
Broker Requirements
Bear call spreads require options approval level 2 or higher (spread trading). Margin requirement is typically the spread width minus the credit received. Some brokers may require higher approval levels. Ensure your account has sufficient buying power for the defined risk.
Helpful Tools & Resources
Strategy Variations
Explore different ways to implement this strategy, each with its own trade-offs and benefits.
Wide Bear Call Spread
Use strikes 3-5 points apart for higher premium collection. Greater risk but higher potential return. Best when confident in resistance levels.
Requires more capital and has larger max loss.
Narrow Bear Call Spread
Use strikes 1-2 points apart for higher probability trades. Lower premium but reduced risk. Good for conservative income generation.
Watch commissions relative to small premium collected.
Weekly Bear Call Spread
Use weekly expirations for faster time decay and more frequent trading opportunities. Higher gamma risk but premium decays rapidly.
Requires more active management and monitoring.
Iron Condor (Bear Call + Bull Put)
Combine bear call spread with bull put spread to profit from range-bound markets. Collects premium on both sides with defined risk.
Doubles the premium but adds downside risk.
Ratio Bear Call Spread
Sell more calls than you buy (e.g., sell 2, buy 1). Increases credit but introduces unlimited upside risk on the extra short calls.
Requires naked option approval and careful risk management.
Risks & Limitations
Overnight gaps above both strikes can result in maximum loss before you can react. Weekend and overnight holding carries gap risk from news events or analyst upgrades.
If your bearish thesis is wrong and the stock rallies, you will lose money. Unlike neutral strategies, bear call spreads have directional risk.
Maximum profit is capped at the net credit received. Even if the stock drops significantly, you cannot earn more than the initial premium collected.
The short call can be assigned at any time, especially when deep in-the-money or near ex-dividend dates. Early assignment creates a short stock position that the long call can cover.
Rising implied volatility increases the value of both calls, typically hurting the position since the short call gains more value than the long call. IV expansion after entry reduces profitability.
Wide bid-ask spreads in illiquid options can significantly impact entry and exit prices, reducing actual returns below theoretical values.
References
- Medvedev, A. (2025). Long-Term Benefits of Call Overwriting. SSRN Working Paper [Link]
- Israelov, R. & Tummala, H. (2017). Which Index Options Should You Sell?. Journal of Investment Strategies, 6(4) [Link]
- Chaput, J.S. & Ederington, L.H. (2005). Vertical Spread Design. Journal of Derivatives, 12(3), 28-46 [Link]
- Israelov, R. & Nielsen, L.N. (2015). Covered Calls Uncovered. Financial Analysts Journal, 71(6) [Link]
Options trading involves significant risk and is not appropriate for all investors. Credit spread strategies have limited profit potential and can result in losses up to the spread width minus credit received. Early assignment risk exists for short options. Before trading options, read the Characteristics and Risks of Standardized Options document. Past performance does not guarantee future results.
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