BEAR CALL SPREAD
Back to GlossaryDefinition
An options strategy combining a short call and a long call at a higher strike to profit from limited downside.
Summary
A bear call spread is a bearish options trading strategy where you simultaneously sell a call option at a lower strike price and buy a call option at a higher strike price, both with the same expiration date. This creates a net credit (you receive money upfront) and profits when the underlying stock price stays below the lower strike price. It's called 'bear' because you're betting on a declining or sideways market, and your maximum profit is limited to the premium received, while your maximum loss is capped at the difference between strike prices minus the net premium received.
Usage Context
This term is crucial when learning about options spreads, risk management strategies, and income-generating techniques in options trading. Students encounter this when studying bearish strategies and comparing different ways to profit from declining markets with limited risk.
Common Confusions
- Mixing up which call option to buy vs. sell (sell lower strike, buy higher strike)
- Confusing bear call spread with bear put spread
- Thinking maximum profit occurs when stock goes to zero (actually occurs when stock stays at or below lower strike)
- Not understanding that both options expire worthless in the best-case scenario
- Confusing this with a bull call spread (opposite strikes and market outlook)
