Call credit spread
A call credit spread, also known as a bear call spread, is a neutral to bearish options strategy that generates income by selling a call option while simultaneously buying another call option at a higher strike price. This limits potential losses while still allowing traders to profit from a decline or stagnation in the underlying asset.
How a call credit spread works
- Sell a call: You sell a call option at a lower strike price, which gives you a premium.
- Buy a call: At the same time, you buy a call option at a higher strike price, which reduces your potential loss but costs a smaller premium than what you receive from the short call.
The goal is for the underlying asset to remain below the strike price of the sold call, allowing both options to expire worthless and you to keep the net premium.
Example: Call credit spread on SPX
Here is an example of a call credit spread on SPX, illustrated by the smart visualization tool OptionStrat. The trader believes that SPX will stay below 5800 during the next two weeks - and sells a call with strike 5800 and buys another call with strike 5820. She collects a net premium of 860 dollars, which is the max profit. The max loss, on the other hand is 1140 dollars, which is calculated as the distance between the calls minus the net premium.
From the example we see that the max profit is reached if SPX stays below 5800. The breakeven price is at 5808.60, and the max loss is reached if SPX ends at 5820 or higher.