When trading options, experienced traders often seek ways to mitigate risk while maximizing returns. One such strategy is the call bear spread, a type of credit spread used to profit from neutral to bearish market conditions. In this article, we will explore what a call bear spread is, when it is best used, and share a real-life example from my trading experience with Morgan Stanley (MS) stock.
A call bear spread, also known as a bear call credit spread, is an options strategy that involves selling a call option at a lower strike price while simultaneously purchasing a call option at a higher strike price. This results in a net credit received, as the premium collected from selling the lower strike call is greater than the cost of buying the higher strike call.
The key idea behind this strategy is that if the stock price remains below the lower strike price at expiration, both options expire worthless, and the trader keeps the entire premium as profit. However, if the stock price rises above the higher strike price, the maximum loss is capped at the difference between the strikes minus the premium received.
When is a Call Bear Spread Best Used?
A call bear spread is most effective in the following scenarios:
- Neutral to Bearish Market Outlook – The stock is expected to trade sideways or decline, but you want to limit potential losses.
- Hedging an Existing Bullish Position – If you already hold a bullish position, such as a bull put spread, a call bear spread can act as a hedge.
- Generating Income – The strategy allows traders to collect premium income while defining risk.
- Low Implied Volatility (IV) Environments – Credit spreads tend to perform well when IV is low because options are relatively cheaper, making it easier to structure favorable risk-reward setups.
Example: Hedging My Morgan Stanley (MS) Position
Recently, I held a bull put spread on Morgan Stanley (MS) stock with the following strike prices:
- 125/85 Bull Put Spread
While the trade was structured to profit from a stable or rising MS price, I recognized the potential risk of a market pullback. To hedge this position, I decided to implement a call bear spread by selling the following option:
- March 7, 2025, 150/155 Call Bear Spread
This means:
- I sold the MS 150 strike call (received premium)
- I bought the MS 155 strike call (paid a smaller premium)
The net premium received from this call bear spread was reinvested into fractional shares of MS, allowing me to build a longer-term equity position while managing risk.
Why This Hedge Made Sense
- The 150/155 call bear spread allowed me to collect additional premium, reducing my overall risk.
- If MS stays below 150 by expiration, the call spread expires worthless, and I keep the full credit.
- Even if MS rises, my maximum loss is defined by the spread width, making it a controlled hedge.
- The reinvestment into fractional MS shares ensures I continue benefiting from long-term stock appreciation.
A call bear spread is a powerful tool for traders who want to hedge bullish positions while still generating premium income. By using this strategy in conjunction with my bull put spread on MS stock, I was able to reduce downside risk, collect premium, and reinvest into fractional shares for long-term growth.
This kind of strategic approach can help traders navigate different market conditions while maintaining risk control. If you’re managing a similar position, consider using a call bear spread as a defensive measure against potential drawdowns while keeping an eye on maximizing returns.