What is a Bear Call Spread?

Published at Feb 9, 2017, in Features

The Bear Call spread, as the name describes, is a bearish trade writes Mike Cornips.

If applied properly, it can also profit from sidewards movement, or even a slight rise in the market; making it an extremely versatile strategy.

So when would we use one?

Quite often when a stock is channelling, it trades between a strong resistance level, and support level. A bounce from a resistance level is a great indication the stock is likely to continue the pattern, and provides a strong entry signal for a Bear Call spread.

When a stock is in downtrend, you can often draw a downtrend line that represents a strong level of resistance. Once the stock has come back to the trend line, and bounces from the line, it is an indication that the stock is ready to continue the down trend and therefore continue lower. This is also a strong entry signal for a Bear Call Spread.

Why would I use a Bear Call Spread?

We often apply this strategy in a way where we can place all of our risk above a strong resistance level. The resistance level then acts like a last line of defence to stop the stock from rising and going against us. If that level breaks, we often use it as a signal to exit the trade.

The other reason traders like this strategy is it can be managed from afar. It doesn’t require too much attention, and is suitable for traders who perhaps work full time and don’t have the capacity to be actively trading day in day out.

Finally, if applied properly, the trade has an opportunity to close out for zero brokerage and fees, halving the cost of the trade.

Let’s run through an example.

The chart below is of Ansell Limited (ASX:ANN).

You can see that Ansell had recently risen to resistance, stalled, and come back down. It had a couple of days of sidewards movement back to the uptrend line, and today it has broken, giving us confirmation that it may continue lower.

The Bear Call spread could profit from a drop in share price, but if ANN continues to go sidewards instead of dropping, it could still make maximum profit.

We can set up the Bear Call to place all our risk above the resistance level of $25.70, which means ANN can rise up to, and even beyond that resistance level (but to a certain point), and we could still have a good result.

However, it should be noted that price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. See professional financial advce.

The reason we set the trade up like this is because the resistance level acts as a defence against the stock rising, but if it does break, we would take it as a strong signal to close the trade.

It should be noted historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering using any trading strategy should seek independent financial advice.

Where to invest $1,000 right now

When the experts at Next Investors have a stock pick, it may pay to listen.

The Next Investors have been investing in ASX small cap stocks for years, with their best small cap picks yielding returns of 1,200%, 1,120%, 900% and 678%.

They have just revealed their hand-picked, FY2021 stock portfolio of high conviction long-term investments.

Click the link below to see what they are currently investing in.


S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Australian ASX Small Cap stocks | Why Finfeed.com is Australia’s leading small cap publication

Founded seven years ago, Finfeed.com is Australia’s leading and longest standing website for investor and finance news, education and expert opinion.

Published by StocksDigital, Finfeed was created to report daily on the comings and goings of ASX listed stocks in the small cap market.

As the first digital publication dedicated specifically to this space, Finfeed soon became the most trusted publication in the market, quickly garnering over two million page views – a number that continues to rise.

Finfeed.com provides its readers with informative articles that tackle the latest in market moving #ASX small cap news, plus exclusive content you won’t find anywhere else. It is aimed at those with an interest in investing, market education, company performance, start-ups and much more.

Finfeed.com is the only media organisation operating under the strength of a Financial Services License and is backed by leading journalists and analysts all with brands of their own.

The website aims to inform, educate and entertain with content that drills down into the heart of financial matters.

Finfeed is a leading source of investor and market information, with everything investors need to know about how to invest written in a way that anyone can understand. 

Over the years, the website has expanded beyond exclusively reporting on small caps, to profile Australia’s leading ASX listed small, mid and large caps as well as some of the country’s most successful CEOs and business leaders to find out what makes them tick.

Every day you will find fresh content covering:

Fast Facts

Over 4,000 articles published

Over 2.3 Million Page Views and counting

Over 10,000 followers on social media

Subscriber list growing by 2% monthly

Thanks for subscribing!