Playbook: Spreads: the Bear Call

Bear Call

The bear call (or ‘call credit spread’) is a vertical credit spread (you will receive a premium for it). It is a short call ‘protected’ on the upside by a long call.

Call credit spreads/bear calls are a way of getting long shares with limited risk.

The short call you buy is OTM but closer to the underlying , so earns more money than the further OTM long call for which you have to pay (the further you go OTM, the cheaper the option). Therefore it is a ‘credit play’ (you get a fee for the set-up).

You typically buy a bear call around 45 days before expiration (45 DTE).

The bear call is the opposite of the bull put.

The position benefits most from IV/IVR contraction and/or decreases to/below the short call. So you benefit from low volatility once you are in the trade.









Income strategy


High (>30)

Entry: 45 DTE
Exit: 21 DTE


Defined: the difference between the strikes minus the credit (premium)

Capped: the net credit received

Short call OTM 0.30Δ
Long call 0.10Δ OTM
Same expiration

XOM Bear Call Feb 17 110/120 on 4 Jan 2023



Volatility rule: Use vertical credit spreads in times of stable or declining market volatility. The width of the spread depends on the steepness of the skew. In steep curves, narrower spreads are recommended so the long option volatility has less of a gap concerning the volatility of the short option. If the skew is less steep, you may use wider spreads to save on commissions.

Time: Usually place vertical spread trades with 30 to 60 days to expiration. This depends on how far out-of-the-money the spread is placed. On far OTM spreads, the theta decay is more linear, so when you’re doing longer trades, as in an iron condor, starting a trade 30 to 60 days from expiration is optimal.

These are the considerations for entering a bear call:

  • The expectation that underlying (stock, ETF, index, future) will go down or sideways (‘rangebound’): the outlook is neutral to bearish.
  • Selling premium is expensive.
  • Not interested in buying puts.
  • Call credit spreads are a way of getting short shares with limited risk.
  • Implied Volatility (IV)/IVR (IV Rank) is high(>30), looking for options to decrease in value over time*
  • IV greater than HV
  • You can make a better return than if you had bought the underlying itself.
  • Executing a bearish trade for income at reduced maximum risk because you buy a call (‘insurance,’ protection at the downside) as well.
  • It’s difficult to sell (‘short’) premium, so it is a leveraged alternative to selling/shorting the underlying.
  • Bringing down the cost, risk, and breakeven on the trade compared to selling (only) the short call: by collecting option premium (‘credit’), the position profits from both time decay (theta) and decreasing underlying prices, at limited risk.
  • The underlying has just experienced an increase, which gives you a strong entry.
  • Hedging against bullish/long positions.
  • Risk is limited (‘defined’) to the difference between the strikes minus the premium received (‘credit’).
  • The maximum reward is capped to the premium received (‘credit’).

* Note: because you’re both buying and selling a call, the potential effect of a decrease in implied volatility will be somewhat neutralized.



  1. ‘Sell to open’ (‘STO’) the call option OTM at 0.30 delta, so above the underlying price (or over 10% ‘cushion’ below the underlying price).
  2. ‘ Buy to open’ (BTO) the further/higher call option ( in US 1 contract = 100 shares) OTM at 0.10 delta (or over 10% cushion from higher strike).
  • Sell the same number of strikes.
  • Both calls should be lower than the current underlying price to ensure a profit even if the underlying doesn’t move at all.
  • Arrange both call strikes to collect a credit of at least 1/3 the width of the spread (while taking into account the deltas/cushions).
  • 70% PoP/P50 (probability 50% profit).
  • Spreads with higher deltas are more sensitive to underlying price changes, are better equipped for management, and improve risk/reward.
  • Look at taking advantage of volatility skew: the differential between option prices based on implied volatility: selling OTM options with higher premium/credit, while at the same time purchasing ATM/ITM options at reduced premium/debit, resulting in higher net credits.


XOM trading at $106.51 on 4 Jan 2023. IV/IVR >30.

Sell 1 short call at 110 strike OTM positive 0.30 delta for a $328 credit call premium (to be credited to your account).

Buy 1 higher long call at 120 strike OTM positive 0.10 delta for a $76 debit put premium (to be paid).

Resulting in a credit to be received of $252.







$748 (= spread width $1,000 -/- net credit $252Creceived)

$252 (spread width – net credit received)

Short (lower) strike price + net credit ($110+2.52= $112.52)

The bear call combines a short call with a long call at the same expiration date, and is one of the four vertical spread strategies (the other ones are: bull put, bull call, and bear put) and the basis for many other strategies, like short condors, and butterflies.

The Greeks





Delta (direction speed)

Delta (speed) is negative and is at its fastest in between the strikes. Notice how Delta slows
down when the position is deep ITM or OTM.

Gamma (acceleration)



Gamma (acceleration)
peaks above the upper (bought) strike and peaks inversely below the lower (sold) strike.

Theta (time decay)


Time decay is helpful to the position when
it is profitable and harmful when it is not.

Vega (volatility)


Volatility is helpful to the position when it is unprofitable and harmful when it is

Rho (interest)


Higher interest rates are generally unhelpful to the position

Entry Rules

Profitable bear calls require correctly selecting bearish underlyings AND good timing.


  • Acknowledge whether market sentiment allows trade.
  • Check whether trade fits in portfolio allocation rules.
  • Ensure stock meets all of your selection criteria (volume, open interest, ask-bid range, etc.).
  • IV/IVR above 30%.
  • Ensure the trend is down/bearish (or at least rangebound/sideways).
  • Ensure at least three of the technical momentum indicators are positive.
  • Identify the clear areas of support and resistance.
  • Make sure there are no major events (dividends, earnings) within 30 days of the expiry date.
  • Profitability of Profit at selected strike: around 50%.
  • Backtest (since 2006 and last 200 trades): at least $1.00 (average and mean) profit/day.

Technical Indicators Used

  1. Trend = bearish
  2. Support & Resistance = the underlying has just experienced an increase to a clear support level
  3. RSI = overbought
  4. Bollinger Bands in combination with Keltner Squeeze: at the top and outside Keltner bands
  5. ADX/DMI: increasing up and above 20
  6. ATR high

Also, the VIX can be used as a great indicator to open a bear call when it goes under 20. Check out this video:

P/L and Risk Profile

Net Position

Net credit, because you receive a premium for selling the call option.

Theoretical Profit

The maximum reward is the net credit, realized when the price of the underlying is at/below the short call.

Both calls will expire worthless, and you keep the net credit.

Theoretical Risk/Risk Profile

As the stock price rises, the Bear Call moves into loss and reaches the maximum loss when the stock rises to/above the higher/long strike price

The maximum risk is the difference between the strikes -/- the net credit received for selling the short call, realized if the underlying price is above the long call.


Underlying short call strike + net call premium/credit.

Managing and Closing Position

Halfway to/Near Expiration

  • If the underlying price decreases close to/below the short call (lower strike), profits increase because the short call is closer to the money and decreases in value faster than the long put.
  • If the underlying decreases to/below the short call: both calls are OTM and worthless and maximum reward (net credit) is achieved)
  • If the underlying is between the call strikes and increases towards the long call (higher strike), the losses increase, because the long call is now closer to the money and increases in value faster than the short call.
  • If the underlying price increases to/above the long call (higher strike): the loss will be the difference between the strikes -/- net credit (theoretical risk).

Rules for Managing/Adjusting Position

  • If the PoP is <33%
  • If the underlying price increases, there are different ways to manage the position:
    • Convert it to an Iron Condor by selling a Bull Put, if you feel the underlying will rebound, but want to give it a bit more time.
    • Roll the tested or breached short call up for extra credit (same expiration) when the short strike is ATM/slightly ITM, but never above breakeven (‘defensive roll’ and always check with your rules – like IVR >30 – and backtest to decide whether you would also have done this as a new set-up).
    • Convert the call credit spread into a Butterfly by adding a debit spread, if you don’t really feel that the underlying will rebound and move to the downside, but still want to stay “in the game” (however, it usually requires staying in very close to expiration to reap the benefits, and therefore is also called a “Time Bomb Butterfly”).
    • Roll the position out in time when the short strike is ATM or slightly ITM (‘vertical roll’), and the long strike is OTM, to extend the duration and the breakeven, and to continue the original strategy.
    • Or invert the spreads for a credit greater than the width of the conversion, as long as the underlying price remains within the short strikes (spread).
    • If this is not workable: allow the limited risk probabilities to play out, or close the position.
  • Set alerts on breakeven/predetermined targets.

Rules for Closing Position/Exiting the Trade

  • Unravel the spread by buying back the calls you sold and selling the calls you bought (this is actually similar to buying a bull call).
  • Close for a 50% profit.
  • Close before the final month before expirations (to avoid volatility going up), so not later than around 21 DTE.
  • You can also decide to close leg-by-leg and leave one leg open if you expect to profit from that.

Mitigating a loss

  • To hedge/recover losses you open a high probability position, using a strategy that favors neutralizing the portfolio’s ∆β, to rebalance and create an overall statistical edge, reduce costs or maintain profits (this is always the goals when adding risk to manage limited risk strategies).
  • Unravel the spread by buying back the call you sold and selling the calls you bought (this is actually similar to buying a bull call).
  • Work with a (mental) stop loss based on an underlying asset of either 50% or 100% of the premium paid. However, for narrow spreads there isn’t much difference in letting the play go into expiry or doing a stop-loss (say at 2x premium): see this video on TastyLive.

Additional Notes


  • Short-term income strategy not necessarily requiring any movement of the stock.
  • Capped downside protection compared to a naked call.


  • Maximum loss is typically greater than the maximum gain, despite the capped downside.
  • High-yielding trades tend to mean less protective cushion and are therefore riskier.
  • Capped downside if the stock goes down.


The short call can be assigned in the event it is ITM. This results in (probably unwanted) stock.

The risk of early assignment is a real risk that must be considered when entering into positions involving short options.

While the long call (higher strike) in a bear call spread has no risk of early assignment, the short call (lower strike) does have such risk. Early assignment of stock options is generally related to dividends, and short calls that are assigned early are generally assigned on the ex-dividend date. In-the-money calls whose time value is higher than the dividend have a high likelihood of being assigned. Therefore, if the stock price is above the strike price of the short call in a bear call spread (the lower strike), an assessment must be made if an early assignment is likely. If the assignment is deemed likely and if a long stock position is not wanted, then appropriate action must be taken.

Before an assignment occurs, the risk of assignment can be eliminated in two ways.:

  1. The entire spread can be closed by buying the short call to close and selling the long call to close as a single Covered Stock order.
  2. The short call can be purchased to close, and the long call can be kept open.

If early assignment of a short call does occur, the obligation to deliver stock can be met either by buying stock in the marketplace or by exercising the long call.

Note, however, that whichever method is chosen, the date of the stock sale will be one day later than the date of the stock purchase. This difference will result in additional fees, including interest charges and commissions. Assignment of a short call might also trigger a margin call if there is not sufficient account equity to support the stock position.

Source: Fidelity Learning Centre

The long put can be ‘exercised’. For this, you need to contact your broker.