Bear Call Spread

A bear call spread is an options trading strategy used by investors who believe that the price of an underlying asset, such as a cryptocurrency, will decrease moderately. It involves selling a call option with a lower strike price and simultaneously buying a call option with a higher strike price, both with the same expiration date.

Example:

Let's say you're bearish on the price of Bitcoin (BTC), which is currently trading at $40,000. You decide to execute a bear call spread using BTC options expiring in one month.

1. Sell Call Option: You sell one BTC call option with a strike price of $42,000 for a premium of $500.
2. Buy Call Option: You buy one BTC call option with a strike price of $45,000 for a premium of $200.

In this scenario, you receive a net credit of $300 ($500 - $200) when opening the spread.

Outcome Scenarios:

1. If the price of BTC remains below $42,000 at expiration:

- Both options expire worthless, and you keep the entire net credit of $300 as profit.

2. If the price of BTC rises above $42,000 but stays below $45,000 at expiration:

- The sold call option is exercised, and you're obligated to sell BTC at $42,000. However, you can cover this obligation by exercising your bought call option, buying BTC at $45,000. Your profit is capped at $2,700 ($45,000 - $42,000 - $300).

3. If the price of BTC rises above $45,000 at expiration:

- Both options are exercised. You're obligated to sell BTC at $42,000 and buy it back at $45,000, resulting in a loss capped at $2,700 minus the initial net credit of $300, totaling $2,400.

In summary, a bear call spread profits from a decrease in the underlying asset's price, limited to the difference in strike prices minus the initial net credit, while also providing downside protection compared to selling a naked call option.