Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Bear Call Spread

Risk: low
Reward: low

General Description
Entering a bear call spread entails selling lower strike calls and buying an equal number of higher strike calls (same expiration month).

(draw a bear call spread risk diagram here)

The Thinking
You're bearish and are confident a stock will move down. So you sell a call (probably in-the-money) that will decline in value when the stock drops (hopefully below the strike price). But if the stock were to rally, you could suffer a big loss, so you buy a higher strike call to protect yourself. This strategy may be preferable over a bear put spread because you are primarily an option seller and therefore benefit from time decay.

XYZ is at $43. You are bearish and think the stock will move down a few points but not much further. Instead of shorting the stock outright, which can be expensive, or employing a bear put spread, which has a net debit to initiate the trade and requires downside movement to profit, you employ a bear call spread, which benefits from time decay. You sell (1) 40 call for $4.00 and buy (1) 45 call for $1.00. The net credit is $3.00.

Below $40, all calls expire worthless, and your profit is the net credit collected when the trade was initiated. This is your max gain.

If the stock trades flat and closes at $43, the 40 call will have decreased in value from $4.00 to $3.00 ($1.00 gain), and the 45 call will have decreased in value from $1.00 to being worthless ($1.00 loss) for a breakeven trade. This is the benefit of being an option seller instead of a buyer. Even though the stock didn’t move, time decay enabled you to get out even.

At $45, the 40 call will have increased in value from $4.00 to $5.00 ($1.00 loss) and the 45 call will have decreased in value from $1.00 to being worthless ($1.00 loss) for a total loss of $2.00. This is your max loss.

The PL chart below graphically shows where this trade will be profitable and at a loss.