A strategy wherein the investor establishes a call option spread by buying call options of a higher strike price and selling call options of a lower strike price.
The name ‘Bear’ spread itself signifies that the investor is bearish on the price of the underlying security.
When to use this strategy?
This strategy is used when the investor is moderately bearish on the underlying security.
How to build this strategy?
This strategy has two legs:
Leg 1 – Buy 1 OTM Call
Leg 2 – Sell 1 ITM Call
Credit Spread/Debit Spread
This is a Credit Spread Strategy.
The profit potential in this strategy is limited.
When is this strategy profitable?
The investor stands to make a maximum profit to the tune of the net premium received if the underlying security’s price is lesser than the strike price of the call option sold.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor stands to lose if the underlying security’s price is greater than the strike price of the call option purchased.