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Options: The Call Bear Spread - Worthwhile or Not?

Posted April 16, 2012

Topics: Finance & Investing

The call bear spread is a two-part strategy best used when you believe the underlying price will decline. It consists of a long call plus a lower-strike short call.

Because the short call has a lower strike, the position always produces a profit. The problem is, both profits and losses are going to be limited. The maximum loss will be the net between the two strikes, minus the net premium received for opening the position.

The maximum profit is the net credit received.

Because profit or loss never can exceed these maximum levels, the credit bear spread is not an exciting strategy. It is defensive, but limited. It does not provide the great potential of strategies that are easier to get into and offer a limited loss or unlimited potential profit (for example, a simple long put).

Some traders find themselves drawn to combined strategies like this even though the potential profit is limited. The danger here is that complexity becomes more appealing than profits.

Before going into any complex strategy, make sure you evaluate all of the possible outcomes and that the range of possibilities makes it worthwhile. Also be sure to chase profits and not just the complexity of the position.

Michael C. Thomsett is an instructor with the New York Institute of Finance. He teaches four options courses: "Swing Trading with Options," "The Amazing World of Options," "The Dividend Strategy with Options" and "Synthetic Options Strategies." He is also an investing and options author and has also written for FT Press' Agile Investor Series, which can be viewed on FTPress.com. Thomsett's latest FT Press book is Trading with Candlesticks.