8/4/2017 Bear Call Spread

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Bear Put Spread
Description options@theocc.com
Bear Spread Spread
A bear call spread is a type of vertical
Bull Call Spread
spread. It contains two calls with the same
Bull Put Spread expiration but different strikes. The strike REGISTER FOR THE OPTIONS
price of the short call is below the strike of EDUCATION PROGRAM
Bull Spread Spread the long call, which means this strategy will Free, unbiased options education
always generate a net cash inflow (net Learn in-person and online
Cash-Backed Call
credit) at the outset. Advance at your own pace
Cash-Secured Put
The short call's main purpose is to generate More Info
Collar Net Position (at expiration)
income, whereas the long call simply helps
Covered Call limit the upside risk.
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EXAMPLE
Covered Put Short 1 XYZ 60 call Webinar - Selecting Options St ...
The profitability of the strategy depends on 16 Online
Covered Ratio Spread how much of the initial premium revenue is Long 1 XYZ 65 call AUG
Register
retained before the strategy is closed out or
Covered Strangle MAXIMUM GAIN Webinar - Tools of the Trade: ...
expires. As the strategy's name suggests, it
Net premium received 23 Online
Long Call does best if the stock stays below the lower AUG
strike price for the duration of the options. Register
Long Call Butterfly
MAXIMUM LOSS
Webinar - What's Behind an Opt ...
High strike - low strike - net 13 Online
Long Call Calendar Spread Still, an unexpected rally should not provoke premium received SEP
Register
a crisis: though the maximum gain of this
Seminar - Options Spreads
Long Call Condor strategy is very limited, so are potential 19 Pasadena, CA
losses. SEP
Long Condor Register
Seminar - Fearless Fundamental ...
Long Iron Butterfly It is interesting to compare this strategy to 19 Pasadena, CA
the bear put spread. The profit/loss payoff SEP
Long Put Register
profiles are exactly the same, once adjusted
Webinar - Why Do Options Price ...
Long Put Butterfly for the net cost to carry. 21 Online
SEP
Long Put Calendar Spread Register
The chief difference is the timing of the cash flows. The bear put spread requires a known
Long Put Condor initial outlay for an unknown eventual return; the bear call spread produces a known initial See all seminars & events
cash inflow in exchange for a possible outlay later on.
Long Ratio Call Spread

Long Ratio Put Spread Outlook

Long Stock Looking for a decline in the underlying stock's price during the life of the options. As with any
limited-time strategy, the investor's long-term forecast for the underlying stock isn't as
Long Straddle important, but this is probably not a suitable choice for those who have a bearish outlook past
the immediate future. It would take an accurately timed forecast to pinpoint the turning point
Long Strangle
where a coming short-term rally would turn into a bearish long term.
Naked Call
Summary
Naked Put
A bear call spread is a limited-risk, limited-reward strategy, consisting of one short call option
Protective Put
and one long call option. This strategy generally profits if the stock price holds steady or
Short Call Butterfly declines.

Short Call Calendar Spread

The most it can generate is the net premium received at the outset. If the forecast is wrong
Short Condor and the stock rallies instead, the losses grow only until the long call caps the amount.

Short Iron Butterfly

Motivation
Short Put Butterfly
The chance to earn income with limited risk, and/or profit from a decline in the underlying
Short Put Calendar Spread stock's price.

Short Stock
Variations
Short Straddle A vertical call spread can be a bullish or bearish strategy, depending on how the strike prices
Short Strangle are selected for the long and short positions. See bull call spread for the bullish counterpart.
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8/4/2017 Bear Call Spread
Short Ratio Put Spread The maximum loss is limited. The worst that can happen at expiration is for the stock price to
be above the higher strike. In that case, the investor will be assigned on the short call, now
Synthetic Long Put deep-in-the-money, and will exercise the long call. The simultaneous exercise and assignment
will mean selling the stock at the lower strike and buying the stock at the higher strike. The
Synthetic Long Stock
maximum loss is the difference between the two strikes, but it is reduced by the net credit
Synthetic Short Stock received at the outset.

Max Gain
The maximum gain is limited. The best that can happen at expiration is for the stock to be
below both strike prices. In that case, both the short and long call options expire worthless,
and the investor pockets the credit received when putting on the position.

Profit/Loss
Both the potential profit and loss for this strategy are very limited and very well-defined. The
initial net credit is the most the investor can hope to make with the strategy. Profits at
expiration start to erode if the stock is above the lower strike price, and losses reach their
maximum if the stock hits the higher strike price. Above the higher strike price, profits from
exercising the long call completely offset further losses on the short call.

The way in which the investor selects the two strike prices determines the maximum income
potential and maximum risk. By selecting a lower short call strike and/or a higher long call
strike, the investor can increase the initial net premium income. However, it may be interesting
to experiment with the Position Simulator to see how such decisions would affect the
likelihood of short call assignment and the level of protection in the event of a big rally.

Breakeven
This strategy breaks even at expiration if the stock price is above the lower strike by the
amount of the initial credit received. In that case the long call would expire worthless, and the
short call's intrinsic value would equal the net credit.

Breakeven = short call strike + net credit received

Volatility
Slight, all other things being equal. Since the strategy involves being short one call and long
another with the same expiration, the effects of volatility shifts on the two contracts may offset
each other to a large degree.

Note, however, that the stock price can move in such a way that a volatility change would
affect one price more than the other.

Time Decay
The passage of time helps the position, though not quite as much as it does a plain short call
position. Since the strategy involves being short one call and long another with the same
expiration, the effects of time decay on the two contracts may offset each other to a large
degree.

Regardless of the theoretical impact of time erosion on the two contracts, it makes sense to
think the passage of time would be a positive. This strategy generates net up-front premium
income, which represents the most the investor can make on the strategy. If there are to be
any claims against it, they must be occur by expiration. As expiration nears, so does the date
after which the investor is free of those obligations.

Assignment Risk
Yes. Early assignment, while possible at any time, generally occurs when the stock goes ex-
dividend. Be warned, however, that using the long call to cover the short call assignment will
require establishing a short stock position for one business day, due to the delay in receiving
assignment notification.

And be aware, a situation where a stock is involved in a restructuring or capitalization event,

such as for example a merger, takeover, spin-off or special dividend, could completely upset
typical expectations regarding early exercise of options on the stock.

Expiration Risk
Yes. The investor cannot know for sure whether or not they were assigned on the short call
until the Monday after expiration. That creates risk. The problem is most acute if the stock is
trading just below, at or just above the short call strike.

Say the short call ends up slightly in-the-money, and the investor buys the stock in the market
in anticipation of being assigned. If assignment fails to occur, the investor won't discover the
unintended net long stock position until the following Monday and is subject to an adverse
move in the stock over the weekend.

There is risk in guessing wrong in the other direction, too. This time, assume the investor bets
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8/4/2017 Bear Call Spread
unexpectedly short the stock, and its value may have risen over the weekend.

Two ways to prepare: close the spread out early, or be prepared for either outcome on
Monday. Either way, it's important to monitor the stock, especially over the last day of trading.

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Related Position
Comparable Position: Bear Put Spread

Opposite Position: Bull Call Spread

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