Chapter 8: Bear Spreads Using Call Options 
SELECTING A BEAR SPREAD 
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Depending on where the underlying stock is trading with respect to the two striking 
prices, the bear spread may be very aggressive, with a high profit potential, or it may 
be less aggressive, with a low profit potential. If a large credit is initially taken in, 
there is obviously the potential for a good deal of profit. However, for the spread to 
take in a large credit, the underlying stock must be well above the lower striking 
price. This means that a relatively substantial downward move would be necessary in 
order for the maximum profit potential to be realized. Thus, a large credit bear 
spread is usually an aggressive position; the spreader needs a substantial move by the 
underlying stock in order to make his maximum profit. The probabilities of this 
occurring cannot be considered large. 
A less aggressive type of bear spread is one in which the underlying stock is 
actually below the lower striking price when the spread is established. The credit 
received from establishing a bear spread in such a situation would be small, but the 
spreader would realize his maximum profit even if the underlying stock remained 
unchanged or actually rose slightly in price by expiration. 
Example: XYZ is trading at a price of 25. The October 30 call might be sold for 1 ½ 
points and the October 35 call bought for½ point with the stock at 29. While the net 
credit, and hence the maximum profit potential, is a small dollar amount, 1 point, it 
will be realized even if XYZ rises slightly by expiration, as long as it does not rise 
above 30. 
It is not always clear which type of spread is better, the large credit bear spread 
or the small credit bear spread. One has a small probability of making a large profit 
and the other has a much larger probability of making a much smaller profit. In gen­
eral, bear spreads established when the underlying stock is closer to the lower strik­
ing price will be the best ones. To see this, note that if a bear spread is initiated when 
the stock is at the higher striking price, the spreader is selling a call that has mostly 
intrinsic value and little time value premium (since it is in-the-money), and is buying 
a call that is nearly all time value. This is just the opposite of what the option strate­
gist should be attempting to do. The basic philosophy of option strategy is to sell time 
value and buy intrinsic value. For this reason, the large credit bear spread is not an 
optimum strategy. It will be interesting to observe later that bear spreads with puts 
are more attractive when the underlying stock is at the higher striking price! 
A bear spread will not collapse right away, even if the underlying stock drops in 
price. This is somewhat similar to the effect that was observed with the call bull 
spreads in Chapter 7. They, too, do not accelerate to their maximum profit potential 
right away. Of course, as time winds down and expiration approaches, then the spread