What it is
You sell a call above today's price and buy another call further up, both expiring together. The lower call is worth more than the higher one, so the pair brings in more than it pays out. Traders also call it a bear call spread, though a decline is not required, only a stock that stays under the sold strike.
The higher call is the ceiling. A sold call on its own loses more with every dollar the stock climbs, without end. Owning the higher call means that past its strike, each dollar lost on one is earned on the other. That ceiling makes the worst outcome the strike gap minus the premium collected.
What has to happen for it to make money
The stock needs to finish below the break-even, which is the sold call's strike plus the credit. Under the sold strike, both calls expire worthless and the credit is kept whole. Between the two strikes the profit shrinks, and at the upper strike or beyond the full loss is reached.
A falling stock pays it, and so does one that drifts sideways. A calm market also helps before expiry: lower volatility makes the sold call cheaper to buy back, partly offset by the bought one losing value too.
Once it is on
A rally toward the sold strike is the moment that needs a decision. Some close the spread there to limit the damage, others roll it higher and further out, which collects more credit but extends the time the risk is carried. If the stock sits between the strikes on the last day, the sold call may be assigned on its own, leaving you short 100 shares into the weekend; closing both legs before expiry avoids that.
A dividend can matter here as well. A sold call in the money just before the ex-dividend date is more likely to be exercised early, because the holder wants the dividend.
What goes wrong
A sharp rally. Takeovers, earnings surprises and short squeezes all move a stock up in jumps, and a jump past the upper strike delivers the full loss at once. The ceiling is what keeps that loss finite.
The ratio. On a spread this narrow the full loss is several times the credit, so it takes several winning trades to pay for one losing one. A high win rate is not the same as a profitable strategy, and this is the structure where that difference shows most.
Pros and cons
- Pro: paid by a falling or sideways stock.
- Pro: the upside risk is capped, unlike a naked call.
- Pro: modest margin, set by the width of the strikes.
- Con: the credit is small against the full loss.
- Con: rallies arrive in jumps that can skip any plan to exit.
- Con: early assignment risk near a dividend.
In Restrike
On the Log and the Portfolio the two calls show as a single position, legs still editable underneath, with the outcome as a percentage of the credit. Under the Log's table, the win rate these spreads require is compared with the one they achieved. Restrike imports them read-only from your broker and never places a trade.