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A bear call spread is a type of vertical spread. It contains two calls with the same expiration but different strikes. The strike price of the short call is below the strike of the long call, which means this strategy will always generate a net cash inflow (net credit) at the outset.

The short call’s main purpose is to generate income, whereas the long call simply helps limit the upside risk.

The profitability of the strategy depends on how much of the initial premium revenue is retained before the strategy is closed out or expires. As the strategy’s name suggests, it does best if the stock stays below the lower strike price for the duration of the options.

Still, an unexpected rally should not provoke a crisis: though the maximum gain of this strategy is very limited, so are potential losses.

It is interesting to compare this strategy to the bear put spread. The profit/loss payoff profiles are exactly the same, once adjusted for the net cost to carry.

The chief difference is the timing of the cash flows. The bear put spread requires a known initial outlay for an unknown eventual return; the bear call spread produces a known initial cash inflow in exchange for a possible outlay later on.

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