Tim Olson
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33 lines
1.4 KiB
Markdown
33 lines
1.4 KiB
Markdown
---
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description: "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."
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tags: [options, income, bearish, vertical-spread]
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---
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# Bear Call Spread
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**Section**: 2.8 | **Asset Class**: Options | **Type**: Income
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## Overview
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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.
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## Construction
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- Buy 1 call option at strike K1 (higher OTM), same expiry
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- Sell 1 call option at strike K2 (lower OTM, K2 < K1)
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Net credit: C = premium received for K2 call - premium paid for K1 call
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## Payoff Profile
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f_T = (S_T - K1)+ - (S_T - K2)+ + C
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- Breakeven: S* = K2 + C
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- Max profit: P_max = C (if S_T <= K2 at expiry; both calls expire worthless)
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- Max loss: L_max = K1 - K2 - C (if S_T >= K1 at expiry)
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## Key Conditions / Signals
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- Bearish to neutral outlook; expects stock to remain below K2 by expiry
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- Prefer when implied volatility is elevated (larger credit received)
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- Income generation with defined upside risk
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## Notes
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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.
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