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Bear Call Spread

A bear call spread is an options trading strategy designed to profit from a decline in the price of the underlying asset. The strategy involves selling a call option at a certain strike price while simultaneously buying another call option at a higher strike price on the same underlying asset and expiration date. This creates a net credit (the amount received from selling the call option minus the cost of buying the other call option).

Example

An investor might sell a call option with a strike price of $50 and buy another call option with a strike price of $55. If the underlying stock remains below $50, the investor keeps the net premium received.

Key points

• A bearish options strategy that profits if the underlying asset's price falls or remains steady.

• Involves selling a call at a lower strike price and buying another at a higher strike price.

• The maximum profit is the net credit received, while the maximum loss is capped.

Quick Answers to Curious Questions

It’s used when an investor expects the underlying asset’s price to decline or remain steady, allowing them to profit from the net credit.

The main risk is if the underlying asset’s price rises above the higher strike price, leading to a potential loss up to the difference between strike prices minus the net credit.

A bear call spread limits both potential losses and profits, whereas a short call has unlimited risk if the underlying asset’s price rises significantly.