A bear call spread is an options trading strategy used when an investor expects a moderate decrease in the price of the underlying asset. This strategy aims to generate profits from a bearish or moderately bearish market outlook while limiting potential losses.
It involves the simultaneous sale of a lower strike call option and the purchase of a higher strike call option. By executing this strategy, the investor receives a premium from the sold call option, which helps offset the cost of buying the call option at the higher strike price. The investor receives a net credit for establishing the position.
The objective of the bear call spread strategy is to benefit from the belief that the underlying asset’s price will either decrease or remain below the lower strike price by the expiration date. If the asset’s price declines, both call options may expire worthless, allowing the investor to retain the premium received as profit. Even if the price doesn’t fall significantly, the maximum potential loss is limited to the difference in strike prices minus the net credit received when initiating the spread.
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