Call Bear spread consists of two in the money call option positions (one sell and one buy) at the same time. Here the trader buys one call option with a higher exercise price XH and sells another call option with a lower exercise price XL. For the first option he pays the premium of CH and for the second options he receives premium of CL.
As both the call options are in of the money and XH > XL, here CL will be higher than CH or CL > CH.
Suppose for this case,
XL = USD 100; XH = USD 150
CL = USD 20; CH = USD 10
Current Share Price, S0 = USD 80
Maximum Profit happens when the share price goes below the lower strike price range (XL = 100 USD) as beyond that both the call options will be expired and he will generate profit equal to the premium difference (Premium received – Premium paid). Maximum Profit = (CL – CH) = 20-10 = USD 10
Maximum Loss happens when the stock price goes higher than the higher strike price range (XH) as here both the call options will be in the money. Profit from buy call option will be negated by the loss from the sell call option. The maximum loss will be the difference between the two strikes minus the net premium which is = (XH – XL) – (CL-CH) = USD (50-10) = USD 40
Breakeven price is the share price where the profit stood at 0 and it separates profit from loss. Here the breakeven price would be = 100+20-10 = USD 110. The breakeven price can easily be determined from the table and the chart.
The following table shows the profit/loss scenarios for different share prices.
The below chart shows the profit/loss for the trading strategy option with the movement of the share price.
Here we have three graphs
A call bear spread is usually a credit spread. A credit spread is where the net cost of the position results in you receiving money up front for the trade. This type of spread is used when the trader is mildly bearish on market direction. i.e. he thinks the stock will go down but the cost of a short stock or long put is too much expensive.
The long call is used to protect the trader from any sharp increases in the stock prices.