Call Credit Spread
A conservative options strategy (also known as a Bear Call Spread) for neutral to bearish market outlooks — collect premium upfront with defined, limited risk.
A call credit spread (also known as a bear call spread) consists of selling a call at a lower strike price and buying a call at a higher strike price — same underlying, same expiration. You receive a net credit upfront and profit from a declining or flat stock price, or from time decay.
Key Characteristic: Established for a net credit. Both calls expire worthless if the stock stays below the short strike — you keep the full credit.
The Setup:
- Sell a call at a lower strike price (collect premium)
- Buy a call at a higher strike price (pay premium for protection)
- Net result: You receive a credit (premium collected − premium paid)
Profit Scenarios:
- Stock price declines below short call strike → Maximum profit
- Stock price stays flat or rises slightly but stays below short call → Profit from time decay
- Best case: Both options expire worthless, you keep the entire credit
Stock XYZ Trading at $100
SELL
1 Call @ $105 strike → Collect $3.00 premium
BUY
1 Call @ $110 strike → Pay $1.00 premium
Net Credit: $2.00 per share ($200 per contract)
Maximum Profit: $200
When stock stays below $105 at expiration
Maximum Loss: $300
($5 spread − $2 credit) × 100. When stock goes above $110
Breakeven Point:
Short strike + Net credit = $105 + $2 = $107
- Limited risk — maximum loss is capped
- Immediate income — receive credit upfront
- Time decay advantage — theta works in your favor
- Lower capital requirement than shorting stock
- Defined risk/reward — know exact P&L before entry
- Limited profit — capped at net credit received
- Loss can exceed profit — risk is often higher than reward
- Assignment risk — early assignment possible on short call
- Requires monitoring if stock rallies
- Two legs mean double commissions
Good Times to Use:
- Stock has had a strong rally and appears overextended
- Technical resistance level ahead
- Bearish chart patterns forming
- High implied volatility (collect more premium)
- Expecting consolidation or slight pullback
Avoid When:
- Strong bullish momentum or breakout
- Positive earnings surprise expected
- Major positive catalyst coming
- Low implied volatility (thin premiums)
- Very close to expiration (gamma risk)
1. RSI — Look for readings above 70 (overbought)
- RSI 70–80: Moderately overbought — good setup
- RSI 80+: Extremely overbought — even better probability of pullback
- Divergence: Stock making new highs but RSI trending down = strong bearish signal
2. Bollinger Bands — Look for price at or above upper band
- Price at upper band: Stock may be overextended
- Best setup: Price touches upper band AND RSI is above 70
Optimal Entry: RSI 75+, price at/above upper Bollinger Band, previous resistance nearby, high IV, 30–45 DTE
- Close position if you've captured 50–75% of maximum profit
- Set a stop loss at 2–3× the credit received
- Consider rolling out and up if stock moves against you
- Don't allocate more than 5% of portfolio to any single spread
- Avoid using the strategy right before earnings announcements
- Select strikes with 70–80% probability of expiring OTM