Bear Call SpreadFunction: Medium-Risk Speculation
Establishing a Bear Call Spread involves buying a call at a higher strike price and selling a call with the same expiration date, but with a lower strike price than the call you bought. Compared to most option spreads, the bear call spread is a low risk, low reward strategy. You make a profit if the underlying stock goes down below the price of the call option that you sold.
The profit for a bear call spread is maximized at the difference between the price of the option you sold less the price you paid for the option you purchased.
Example: Yahoo (YHOO) trades at $45, and you believe it will go down over the next month. You write (sell) a 1-month call with a strike price of $44 for $2.10, and you buy a 1-month call with a strike price of $46 for $.50. You have a net cash inflow of $160.00, excluding commissions ($2.10x100 - $.50x100). If the stock ends anywhere below $44, both call options will expire worthless, and you will be able to keep the entire $160.
Bear Call Spread Payoff Graph: