Overbought Markets and Bear Call Spreads: Hedging Without Going Full Bear

Look at the SPY daily chart below.

It's exactly the kind of tape that makes traders uneasy:

A long, steady climb with only shallow pullbacks. Fresh highs or near-highs. Very few "easy" entries left if you're under-invested.

If you've been long through that climb, your account probably looks good. But your instincts are starting to itch. Sentiment is glowing, volatility is sleepy, and every dip gets bought almost instantly. You're not calling for a crash, you just suspect the odds of "up another 15%" are lower than the odds of "we finally cool off."

That's the overbought paradox: You want some protection. You don't want to dump quality positions or buy expensive lottery-ticket puts. You're not bearish on the next year or decade, just skeptical about the next few weeks or months.

That's where bear call spreads deserve a place in the toolbox, especially for premium sellers.

What "Overbought" Really Means

Most traders hear "overbought" and think "top." That's not how I use it.

Overbought simply means the easy part of the move is probably behind us and the risk-reward has shifted. Look at the chart again. SPY has marched from the lower-left to upper-right in a persistent uptrend. The rally that started around the 480 level has carried prices to 683, with only brief interruptions.

That's not necessarily wrong. Markets can stay overbought for weeks or months. But from a probability standpoint, the distribution of outcomes changes:

Short-term indicators like RSI are often above 70, if not 80. Volatility is subdued, the VIX sitting near multi-year lows. Breadth can start to narrow as a smaller group of big names does most of the lifting. Sentiment gets one-sided; very few people are openly bearish.

The odds of a sharp crash might still be low. But the odds of sideways to modestly lower price action rise. That's exactly the environment where collecting premium above the market can make more sense than buying protection below it.

Why Traditional Put Hedging So Often Disappoints

The "standard playbook" for hedging is simple: buy puts, or put spreads, under your holdings.

The problem isn't that puts never work. The problem is that you pay for them every time, and they only pay you back occasionally.

If you routinely spend 2 to 3% of portfolio value every few months on protective puts that expire worthless, you're handing back a big chunk of your long-term edge. Do that for a year and you're talking about a decent amount of capital spent on insurance that rarely pays out in full.

That might make sense if you're sitting on unusually concentrated risk, or if you're deliberately limiting drawdowns at any cost. But for most traders, that constant bleed is simply too much. You're trying to protect the portfolio from the market, and in the process you quietly drain it yourself.

Overbought conditions call for something more efficient.

Enter the Bear Call Spread

A bear call spread is a defined-risk, credit-collecting way of saying: "I don't need the market to fall apart. I just don't think it's going to run a lot higher from here."

Mechanically, you sell a call option at a strike above the current price, then buy another call at an even higher strike in the same expiration to cap your risk. You receive a net credit upfront. That credit is your maximum profit. The width of the spread minus that credit is your maximum loss.

You win if price finishes at or below the short strike at expiration, or if price drifts higher but not by enough to push the spread to full loss and you manage it intelligently before then.

You lose, in a defined way, if price moves aggressively above your strikes and stays there.

So rather than buying insurance, you're selling a conditional promise: "If SPY blasts higher beyond this level by expiration, I'll compensate whoever bought this spread from me." You get paid upfront for making that promise, and probabilities can be structured in your favor.

Reading the Options Chain: Turning a Chart into a Trade

Now look at the options chain snapshot below for SPY January 16, 2026 calls.

You're seeing strikes around current price (SPY at 683.63):

The columns tell the story:

Prob.Touch: The model's estimate that price will touch that strike at least once before expiration. The 705 call shows 44.84%, less than a coin flip.

Prob.OTM: The probability the option expires out of the money. For the 705 call, it shows 76.80%. That means roughly three out of four times, this option expires worthless.

Delta: Roughly the option's sensitivity to SPY and a proxy for probability of finishing in-the-money at expiration. The 705 call has a 0.24 delta, about a 24% chance of being ITM.

Bid/Ask: The market prices. For the 705 call, around 3.71 × 3.73. For the 710 call, about 2.55 × 2.57. Net credit $1.16.

Here's how to build a simple, rules-based bear call spread using this information:

Step 1: Choose your expiration. Often 30-60 days works well, though the screenshot shows a longer-dated example (January 2026, roughly 37 days out from the image date). Longer expirations give you more room to manage and adjust.

Step 2: Find a short call with a delta in the 0.20-0.30 range. Here, the 705 call at 0.24 delta fits perfectly. This is about 3% above current price, enough room that you're not selling right at-the-money, but close enough to collect meaningful premium.

Step 3: Buy the next call up to define risk. In this case, the 710 call.

Step 4: Calculate the net credit:

• Sell 705 call near 3.72

• Buy 710 call near 2.56

• Net credit ≈ $1.16, or $116 per spread (before transaction costs)

Step 5: Know the max loss:

• Spread width is 5 points = $500

• Max loss ≈ $500 - $116 = $384 per spread

Now tie this back to the chart. SPY sits around 683. Your short strike sits at 705, about 3% above current price. The platform is telling you there's roughly a three-in-four chance that SPY finishes below 705 by expiration.

You're effectively saying: "I'm willing to bet that, by January, SPY won't be beyond 705 by enough to make this spread a full loser. If I'm right, I keep the majority or all of that $116 credit. If I'm wrong, I know my worst-case cost before entering."

That's a very different psychological and mathematical profile than constantly spending 2-3% on puts that might never pay.

When Bear Call Spreads Make the Most Sense

Using the chart and chain together, here's when this kind of trade tends to be most useful:

After a strong rally, not after a crash. The chart shows a persistent uptrend with brief pullbacks. That's classic "sell some upside premium" terrain. You're not trying to catch a falling knife, you're stepping in front of momentum that's already well-established.

When implied volatility is moderate to low. You still want a reasonable credit relative to width, but you're not trying to hedge a volatility spike that already happened. The fact that you're collecting $116 on a $500 wide spread (about 23% of width) in a sleepy market is actually attractive.

When your core view is "sideways to modestly down," not "crash." If you truly expect a major decline, you might supplement with puts or other downside structures. Bear call spreads are for when you think the party's winding down, not when you think the building's on fire.

When your portfolio is net long. Think long equity, LEAPS, PMCCs, or Wheel positions that have benefited from the run. The bear call spread becomes a partial counterweight to that bullish exposure.

In other words, the spread isn't about being a hero and calling the top. It's about tilting the odds a bit back in your favor when the tape has already rewarded longs.

Portfolio Context: Pairing With Cash-Secured Puts and PMCCs

In The Income Foundation, we often lean on cash-secured puts in neutral or mildly bullish markets. We get paid to agree to buy quality names at lower prices. If we're assigned, we transition to covered calls and keep the Wheel moving.

In Wealth Without Shares, we use Poor Man's Covered Calls (PMCCs), long deep-in-the-money LEAPS for cheap "synthetic stock," then short calls against those LEAPS to generate income and lower basis.

Now overlay the bear call spread idea:

When markets are fairly valued or on sale: CSPs and PMCCs do the heavy lifting. You're happy to get long exposure and harvest premium.

When markets feel stretched, like SPY in the chart: You can layer bear call spreads on top of your existing bullish structures, especially in broad indices, to offset some risk and generate income from the "too far, too fast" phase.

This turns your options activity into a framework, not a guess. Bullish to neutral conditions get CSPs, covered calls, and PMCCs. Stretched, overbought phases get defined-risk bear call spreads above. Sideways, range-bound periods can evolve into iron condors using both call and put spreads around the same underlying.

You're not shifting from "bull" to "bear" every few days. You're adjusting the mix of premium you sell as the underlying tape changes character.

Risk Management and Trade Management

The biggest mistakes with bear call spreads usually come from position size and ignoring the trade once it's on.

Here's a simple management framework:

Sizing: Decide what percentage of your portfolio you're willing to risk if everything goes wrong on this spread. For many traders, that might be 0.5-2% per strategy. Work backward from max loss. In the example, max loss is about $384. If you're comfortable risking roughly $1,000 on this idea, that's 2-3 spreads, not 10.

Taking Profits: If you can buy the spread back for 25-50% of the original credit, the risk-reward usually flips. On a $1.16 credit, that means seriously considering taking profits if you can close the spread somewhere in the $0.30-$0.60 range, especially while time remains. You've captured the majority of the gain, and now you're just risking that profit for diminishing returns.

Cutting Losses: If the spread trades to 50% of max loss (the mark value approaches ~$2.50-$3.00 on a $5 wide spread), you should have a pre-planned decision. Take the loss and move on, or roll up and out if your thesis hasn't changed and risk fits your plan.

The key is to decide these rules before SPY is surging toward your strikes, not after.

Common Questions

"What if SPY just keeps grinding higher slowly?"

Time decay still works in your favor as long as price doesn't accelerate past your strikes. Small, choppy moves up and down often help, because options bleed as traders keep repricing small probabilities. Look at the Prob.OTM column again, 76.80% for the 705 call. Every day that passes without a sharp rally, that probability gets repriced in your favor.

"What if volatility suddenly spikes?"

If the move up is driven by a volatility event, the spread might expand faster than you like. That's why you limit size and respect your max loss thresholds. You can also pair call spreads with small, opportunistic long-volatility hedges if that fits your style.

"Is this market timing?"

Not in the crystal-ball sense. You're not trying to nail the exact top. You're simply saying, "Given where we are on the chart and the probabilities the option chain is offering me, I'm willing to sell some upside insurance." The chart shows the trend. The chain shows the probabilities. You're connecting the two with defined risk.

A Mental Model: Probabilities Over Stories

The images tell a simple story: A long trend, currently extended. A 24-delta call with roughly a 77% chance of expiring out of the money.

You could invent ten narratives about inflation, elections, AI, or the Fed. None of them change the basic math. If you consistently sell defined-risk spreads where the odds are 60-80% in your favor, and you size them sensibly, your long-run results will be driven far more by discipline and position sizing than by hero calls.

That's why I like using structures like bear call spreads for hedging overbought markets. They stay grounded in numbers rather than headlines.

The Takeaway

You don't have to call the top. You don't have to sell all your winners. You don't have to spend a fortune on puts that may never pay.

Instead, you can look at the tape, look at the option chain, and quietly say: "This market has run a long way. I'm willing to sell a little upside that I probably won't see, for a defined, manageable amount of risk."

That's what a bear call spread gives you: Income instead of constant insurance costs. Defined risk instead of open-ended short calls. A way to lean against overbought conditions without abandoning your long-term bullish posture.

In other words, hedge like a probabilist, not a prophet.

Probabilities over predictions,

Andy Crowder

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Disclaimer: This is educational content only. Not investment, tax, or legal advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money.