Bear Call Spread
Description
The Bear Call Spread is an intermediate strategy that can be profitable for stocks that
are either rangebound or falling.
The concept is to protect the downside of a Naked Call by buying a higher strike
call to insure the one you sold. Both call strikes should be higher than the current
stock price so as to ensure a profit even if the stock doesn’t move at all.
The higher strike call that you buy is further OTM than the lower strike call that
you sell. Therefore, you receive a net credit because you buy a cheaper option than the
one you sell, thereby highlighting that options are cheaper the further OTM you go.
If the stock falls, both calls will expire worthless, and you simply retain the net
credit.
If the stock rises, then your breakeven is the lower strike plus the net credit you
receive. Provided the stock remains below that level, then you’ll make a profit.
Otherwise you could make a loss. Your maximum loss is the difference in strikes less
the net credit received.
P/L Profile
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