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## Skill Sheet: What You Will Learn Here

• What is a bear call spread?
• What is a bear put spread?
• Construction of bear call and bear put spreads

A Bear Call Spread is created by selling a call option and buying another call option of the same underlying asset and expiration date but a higher strike price.

Since the call option sold is costlier than the one that is bought, this spread becomes a credit spread.

The following diagram is a payoff diagram of a Bear Call Spread: Selling 18900CE Nifty 0f 29 December expiry for 182.2

Buying 19100CE Nifty of 29 December expiry for 100.7

Net credit in the trade = 182.2-100.7=81.5

On a per lot basis, this works out to a net credit of Rs 4,075. (This is different from bull call spread, which was a debit strategy.)

This amount is also the maximum profit for the strategy.

The maximum loss is equal to the difference in the strike prices and the net premium

= 19100-18900-81.5=118.5

On a per lot basis, this works out to Rs 5,925.

Notice the margin required to create the Bear Call Spread is Rs 27,961

A Bear Put Spread is created by buying a put option and selling another put option of the same underlying asset and expiration date but with a lower strike price.

Since the put bought is costlier than the put sold, this is a debit strategy. (Unlike the bull put spread, which was a credit strategy.)

The following diagram represents a payoff diagram of a Bear Put Spread. Selling 18,500PE Nifty of 29 December expiry for 119.6.

Buying 18900PE Nifty of 29 December expiry for 266.5.2

Net credit in the trade = 119.6-266.5=-146.9

On a per lot basis, this works out to a net debit of Rs 7,345.

This amount is also the maximum loss for the strategy.

The maximum gain is equal to the difference in the strike prices and the net premium

=18900-18500-146.9=253.1On a per lot basis the maximum profit works out to Rs 12,655.

Notice that the two-legged strategy has been created by paying a margin of Rs 18,696

We have looked at the four vertical spreads, but the question is when to use which one.

Since the names are categorised as bull and bear, all bullish strategies will use either a Bull Call Spread or a Bull Put Spread.

Similarly, in the case of a bearish expectation trade, either the Bear Call Spread or the Bear Put Spread will benefit from the downward move.

The next step is to select between Credit Spreads or Debit Spreads. If the trader expects a slow move ahead, it is better to use Credit Spread as the loss in option value will benefit the trader.

If the trader expects a fast move, Debit Spreads are better as the reward is higher than the risk and offers a higher profit potential to the trader.

Points to remember:

• A bear call spread and bear put spread are bearish strategies.
• Unlike the bull spreads, the bear call spread is a credit strategy while the bear put spread is a debit strategy.
• Credit spreads are useful for slow price moves while debit spreads are helpful for fast price movements.
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