Tim Olson
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1.4 KiB
1.4 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A bearish vertical spread selling a lower-strike OTM call at K2 and buying a higher-strike OTM call at K1 for a net credit, profiting if the stock stays below K2. |
|
Bear Call Spread
Section: 2.8 | Asset Class: Options | Type: Income
Overview
The bear call spread is a vertical spread consisting of a long position in an OTM call option with strike K1, and a short position in another OTM call option with a lower strike K2 (K2 < K1). This is a net credit trade. The trader's outlook is bearish. This is an income strategy.
Construction
- Buy 1 call option at strike K1 (higher OTM), same expiry
- Sell 1 call option at strike K2 (lower OTM, K2 < K1)
Net credit: C = premium received for K2 call - premium paid for K1 call
Payoff Profile
f_T = (S_T - K1)+ - (S_T - K2)+ + C
- Breakeven: S* = K2 + C
- Max profit: P_max = C (if S_T <= K2 at expiry; both calls expire worthless)
- Max loss: L_max = K1 - K2 - C (if S_T >= K1 at expiry)
Key Conditions / Signals
- Bearish to neutral outlook; expects stock to remain below K2 by expiry
- Prefer when implied volatility is elevated (larger credit received)
- Income generation with defined upside risk
Notes
The bear call spread is a credit spread. Maximum profit is limited to the net credit received. Maximum loss is the spread width minus the credit. The long call at K1 caps the loss relative to a naked short call.