Bear Call Spread

A bear call spread is a type of vertical spread. It contains two calls with the same expiration but
different strikes. The strike price of the short call is below the strike of the long call, which
means this strategy will always generate a net cash inflow (net credit) at the outset. An investor
who enters into a bear spread is hoping that the stock price will decline.
Strike price of long call option K2 = 50, Premium C = 2
Strike price of Short call option K1 = 40, Premium C= 5
So, Net Premium = (5-2) = 3

Profit/Los
s
Short Call, Strike
K1

5
3

-2

ST

40
Long Call, Strike
K2

43

50

-7

Breakeven point of long call = Long call strike price + Premium paid = 50 + 2 = 52
Breakeven point of short call = Short call strike price + Premium received = 40 + 5 = 45
Breakeven Point of bear call spread = Strike price of short call + Net premium received
= 40 + 3 = 43

Maximum Loss = Strike price of long call - Strike price of short call - Net premium received +
Commissions paid = 50 40 3 = 7
Maximum Profit = Net premium paid + Commission paid = 3

Payoff Table of Bear Call Spread

Stock Price

Payoff from long call

Payoff from short

Totally

Net payoff (After

option

call option

Payoff

adjustment)

30

0+(3) = 3

40

0+(3) = 3

43

K1-ST =40-43 = -3

-3

-3 + 3 = 0

50

ST-K2 = 50-50 = 0

K1-ST = 40-50 = -10

-10

-10 + 3 = -7

53

ST-K2 =53-50 = 3

K1-ST =40-53 = -13

-10

-10 + 3 = -7

Explanation: If the stock price is 30, neither short nor long call option will be exercised. We
have an initial inflow of 3. So the total payoff will be 3. If the stock price is 43, long call option
will be worthless and payoff from short call will be -3. After making adjustment, our total payoff
will be -3+3 = 0. As the total payoff is 0 at stock price 43, this will be the breakeven point of bear
call option. If the stock price is 53 at the expiration date, both the long and short call option will
be exercised. The payoff of short call and long call will be -13 and 3 respectively. Total payoff
after making adjustment will be -7.
In short, Maximum profit from a bear call spread will be gained when the stock price is equal or
less than lower strike price and maximum loss will be occurred when stock price is equal or
greater than the higher strike price. Here, the maximum profit will be 3 when the stock price is
equal or less than 40. Maximum loss will be 7, when the stock price is equal or greater than 50.