190 Part II: Call Option Strategies 
will approach its maximum profit potential. This is important to understand because, 
if one is expecting a quick move down by the underlying stock, he might need to use 
a call bear spread in which the lower strike is actually somewhat deeply in-the­
money, while the upper strike is out-of-the-money. In this case, the in-the-money call 
will decline in value as the stock moves down, even if that downward move happens 
immediately. Meanwhile, the out-of-the-money long call protects against a disastrous 
upside breakout by the stock. This type of bear spread is really akin to selling a deep 
in-the-money call for its raw downside profit potential and buying an out-of-the­
money call merely as disaster insurance. 
FOLLOW-UP ACTION 
Follow-up strategies are not difficult, in general, for bear spreads. The major thing 
that the strategist must be aware of is impending assignment of the short call. If the 
short side of the spread is in-the-money and has no time premium remaining, the 
spread should be closed regardless of how much time remains until expiration. This 
disappearance of time value premium could be caused either by the stock being 
significantly above the striking price of the stock call, or by an impending dividend 
payment. In either case, the spread should be closed to avoid assignment and the 
resultant large commission costs on stock transactions. Note that the large credit 
bear spread (one established with the stock well above the lower striking price) is 
dangerous from the viewpoint of early assignment, since the time value premium 
in the call will be small to begin with. 
SUMMARY 
The call bear spread is a bearishly oriented strategy. Since the spread is a credit 
spread, requiring only a reduction in buying power but no actual layout of cash to 
establish, it is a moderately popular strategy. The bear spread using calls may not be 
the optimum type of bearish spread that is available; a bear spread using put options 
maybe.