To start, let’s explain what a bear call spread is. A bear call spread represents one of four basic vertical spreads. It means using a type of options strategy that presupposes to sell the call option and at the same time to buy a different call option without changing the expiration date, but at a higher strike price. If the strike price of the sold call is lower than the purchased call price, the premium obtained for the sold call (usually named the short call leg), is higher than the premium paid for the purchased call (long call leg).
Traditionally, a bear call spread brings an upfront premium, therefore, it is also called a credit call spread, or a short call spread. The strategy is usually used to get the income out of the trader’s bearish opinion from the index, stock, etc.
Bear Call Spread in practice
Let’s assume that XXX stock trades at $37 in October. The options trader feels rather bearish about XXX price and makes a decision to open a bear call spread position and buy NOV 40 call for $100 and sell a NOV 35 call for $300, which gives him $200 credit for making this trade.
Finally, the price of the XXX falls down to $34 by the expiration date. It means, that both options became worthless and out of money, and the trader keeps the $200 credit as profit, making this the best scenario for the trader.