A bear call spread is an options trading strategy that uses two call options with the same expiration date but different strike prices. Traders use it when they expect an asset, like a stock, index, or cryptocurrency, to stay the same or move slightly lower in price. The strategy earns limited income and carries limited risk.
Breaking it down
The setup has two legs:
- Short call – You sell a call option at a lower strike price. This is where your profit comes from: you collect the premium upfront. If the stock stays below this strike, that option expires worthless and you keep the cash.
- Long call – To cap your risk, you buy another call option with a higher strike price. This way, if the stock unexpectedly shoots up, your losses are limited because the long call offsets the short one.
The sold option generates cash upfront, while the bought option acts as insurance in case the price jumps unexpectedly.
Example
Let’s say you think XYZ stock, currently at $48, isn’t climbing above $50 anytime soon. You:
- Sell a $50 call and collect a premium.
- Buy a $60 call (same expiration) as protection.
If the stock stays below $50, you pocket the premium. That’s your maximum profit. If it rises above $50 but doesn’t breach $60, you’ll start giving back some of that gain, but your loss is capped. If it rockets past $60, the long call kicks in and prevents further damage.
The trade-off? You don’t make huge profits, but you also don’t risk unlimited losses like you would if you only sold a naked call.
When traders use it
A bear call spread works best when:
- The trader expects prices to stay flat or decline slightly.
- Volatility is moderate or falling.
- They want steady income with defined risk rather than unlimited exposure.
This strategy is popular in both traditional stock trading and crypto derivatives markets because it balances reward and protection.
