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What Is a Bear Call Spread?
With a bear call spread, traders sell a call at a higher strike price and buy one at a lower price to earn a net premium while betting on a price decline or stability in an underlying security with limited risk.
Oct 17, 2024 at 05:48 pm
1. Understanding Bear Call Spreads
Definition:
A bear call spread is an options trading strategy that involves selling a higher-strike call option and buying a lower-strike call option on the same underlying security, both with the same expiration date.
2. Structure of a Bear Call Spread:
- Leg 1: Sell a call option with a higher strike price (OTM or slightly ITM).
- Leg 2: Buy a call option with a lower strike price (usually OTM or deeply ITM).
- Net Premium: The net premium received from selling the higher-strike call is greater than the premium paid for buying the lower-strike call.
3. Profit and Loss Profile:
- Profit: Bear call spreads profit when the underlying security price falls or remains below the strike price of the sold call.
- Loss: Bear call spreads incur a loss when the underlying security price rises above the strike price of the sold call.
4. Breakeven Point:
The breakeven point for a bear call spread is the underlying security price at which the profit and loss break even. It is calculated as follows:
Breakeven Point = (Strike Price of Sold Call - Strike Price of Bought Call) + (Net Premium Received)5. Strategy Analysis:
- Bullish Outlook: Bear call spreads are suitable when the trader has a bearish outlook on the underlying security and expects its price to fall or remain below the strike price of the sold call.
- Limited Risk: The maximum loss is limited to the net premium received.
- Neutral Theta: Bear call spreads have neutral theta to options, meaning they do not gain or lose value over time due to the passage of time.
- Income Generation: Bear call spreads can generate income if the underlying security price remains below the breakeven point.
Disclaimer:info@kdj.com
The information provided is not trading advice. kdj.com does not assume any responsibility for any investments made based on the information provided in this article. Cryptocurrencies are highly volatile and it is highly recommended that you invest with caution after thorough research！
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