🐻Bear Call Spread

Call Credit Spread

A Bear Call Spread is a two-part strategy where one simultaneously sells a call option and buys another call option with a higher strike price on the same underlier and expiry date.

  • Directional strategy

  • Different strike prices, same expiry date

When the position is opened, the premium received from writing (shorting) the call option is more than the premium paid for the long call option, resulting in a premium credited (added) to the trader's account when the position is entered.

The loss potential is unlimited when selling a call option at a lower strike price. However, buying a call option at a higher strike price limits the risk of the position and defines a maximum loss.

Suppose Bitcoin is at $17,000. We want to receive an upfront premium, so we sell a call option with a strike of $18,000 and an expiration date of Jan 27, 2023.

Premium earned: $926.67

When selling the call option, losses are unlimited. Buying at a higher strike price limits losses, so we purchase a call option with a strike of $19,000 with the same expiration.

Cost of premium: -$626

The risk associated with selling the call option with the lower strike price is reduced by buying the call option with the higher strike price.

On the downside, buying a call option after you have sold reduces the amount of the option premium. Then you have less profit potential.

Net Premium

This is the net premium you would receive upfront from putting on this particular sample option strategy. The net premium is equal to $300.

Maximum potential loss equals the difference in call strike prices (high strike price minus low strike price) minus the net premium. You get a maximum potential loss of $700.

Maximum potential profit is equal to the net premium. You get a maximum potential profit of $300.

Breakeven point = Strike price of the short call + Net Premium. The Break-even point is $18,300.

More downside protection is provided by the bear call spread but at a higher premium. It is also closely related to a bull put spread, and deviations from their relationship can represent arbitrage opportunities.

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