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Call credit spread
A call credit spread (bear call spread) is a two-legged, defined-risk, neutral-to-bearish option strategy. You sell a lower-strike call and buy a higher-strike call with the same expiration, collecting a net credit. The chart below shows a call credit spread with short call strike 100 at $5, long call strike 105 at $2, and the profit/loss diagram.
Greeks and this strategy
| Greek | How it behaves |
|---|---|
| Delta | Negative to neutral. Net delta is negative but smaller than a naked short call; bullish moves still hurt but wings cap risk. |
| Theta | Positive. Time decay generally helps when price stays below the short strike. |
| Gamma | Negative. Large upward moves still increase losses faster as the short leg gains delta. |
| Vega | Negative. Lower implied volatility tends to shrink spread value in the seller's favor. |
Overview of call credit spread
A call credit spread combines a short call at a lower strike with a long call at a higher strike. Both legs share the same expiration date and underlying asset. The long call caps the unlimited risk of the naked short call, so maximum loss is limited to the spread width minus the net credit received. Each contract represents 100 shares of the underlying (relevant for the US market).
Market outlook for call credit spread
Traders open a call credit spread when they expect the underlying price to stay below the short call strike through expiration, or at least not rise enough to erode the collected premium. Wider spreads offer more credit but also increase maximum loss. Moving the short strike further out of the money improves the probability of keeping the full credit, but reduces the premium collected.
How to open a call credit spread
Open the position by selling a call at the lower strike and simultaneously buying a call at the higher strike. Both orders are typically placed as a single vertical spread order. The net credit received is the short call premium minus the long call premium. Market participants evaluate strike selection, time to expiration, implied volatility, and the distance of strikes from the current stock price.
Profit/loss diagram for a call credit spread
Maximum profit equals the net credit received and is realized if the stock is at or below the short strike at expiration. Maximum loss equals the spread width minus the net credit. For example, selling a $100 call for $5.00 and buying a $105 call for $2.00 creates a $3.00 credit on a $5.00-wide spread. Maximum profit is $300 per contract and maximum loss is $200 per contract. The upper break-even at expiration is the short strike plus the net credit, or $103 in this example.
How to enter a call credit spread
Submit a vertical call credit spread order to your broker, specifying the short and long strikes and a limit price for the net credit. The order is filled when the market provides at least your limit credit. Opening the spread credits your account with the net premium minus commissions.
How to exit a call credit spread
Close the spread before expiration by buying back the short call and selling the long call as a single order. If the spread can be closed for less than the original credit, you keep the difference as profit. At expiration, if both legs expire out of the money, the position expires worthless and you keep the full credit. If the stock is above the short strike, assignment risk on the short call may require closing or rolling the position.
The impact of time decay on a call credit spread
Time decay generally works in favor of the call credit spread seller when the underlying stays below the short strike. As expiration approaches, the extrinsic value of both calls declines, which tends to reduce the cost of closing the spread. Implied volatility changes affect both legs and can widen or narrow the spread value before expiration.