Chapter 8: Bear Spreads Using Call Options 187 
Example: An investor is bearish on XYZ. Using the same prices that were used for 
the examples in Chapter 7, an example of a bear spread can be constructed for: 
XYZ common, 32; 
XYZ October 30 call, 3; and 
XYZ October 35 call, 1. 
A bear spread would be established by buying the October 35 call and selling the 
October 30 call. This would be done for a 2-point credit, before commissions. In a 
bear spread situation, the strategist is hoping that the stock will drop in price and that 
both options will expire worthless. If this happens, he will not have to pay anything 
to close his spread; he will profit by the entire amount of the original credit taken in. 
In this example, then, the maximum profit potential is 2 points, since that is the 
amount of the initial credit. This profit would be realized if XYZ were anywhere 
below 30 at expiration, because both options would expire worthless in that case. 
If the spread expands in price, rather than contracts, the bear spreader will be 
losing money. This expansion would occur in a rising market. The maximum amount 
that this spread could expand to is 5 points - the difference between the striking 
prices. Hence, the most that the bear spreader would have to pay to buy back this 
spread would be 5 points, resulting in a maximum potential loss of 3 points. This loss 
would be realized if XYZ were anywhere above 35 at October expiration. Table 8-1 
and Figure 8-1 depict the actual profit and loss potential of this example at expiration 
(commissions are not included). The astute reader will note that the figures in the 
table are exactly the reverse of those shown for the bull spread example in Chapter 
7. Also, the profit graph of the bear spread looks like a bull spread profit graph that 
has been turned upside down. All bear spreads have a profit graph with the same 
shape at expiration as the graph shown in Figure 8-1. 
TABLE 8-1. 
Bear spread. 
XYZ Price at October 30 October 35 Total 
Expiration Profit Profit Profit 
25 +$300 -$100 +$200 
30 + 300 - 100 + 200 
32 + 100 - 100 0 
35 - 200 - 100 - 300 
40 - 700 + 400 - 300