A bear call spread option strategy involves a bearish option strategy where you purchase a call option, and at the same time, you sell a call option that has a lower strike price on the same expiry date and the same underlying asset. You get a premium on selling a call option, whereas you pay out a premium for buying the call option.
Published on 17 March 2022
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This strategy involves lesser risk, but the profit is limited to the actual difference between the premium that you receive and the premium that you pay. A trader makes use of this strategy when they feel that the price of the underlying asset will fall moderately.
The strategy is also called credit call spread because you receive a net credit when you initiate the trade.
Let us understand the bear call strategy in detail.
When Should Bear Call Spread Option Strategy be Initiated?
A bear call spread strategy is initiated when the trader is expecting the underlying asset’s price to fall moderately or remain steady in the coming time. It has two elements- buy and short call. The trader buys the call to limit the risk if the price of the underlying asset increases, whereas the main purpose of the short call is to generate profits.
How Can You Construct a Bear Call Spread Option Strategy?
You can implement the bear call spread strategy by selling an ATM call option and buying an OTM call option simultaneously. The buying and selling involve the same underlying asset and the same expiration date. In this strategy, the strike price is customisable as per the trader’s discretion.
Suppose the Nifty trades at 9300. A trader, Mr X, feels that the price will become less than 9300 or will stay the same in the near term. So, he initiates a bear call spread by selling ATM at a strike price of ₹9300 and receives a premium of ₹105. He simultaneously buys an OTM at a strike price of ₹9400 and pays a premium of ₹55. The net premium that the trader will receive will be ₹50. Thus, the maximum profit that the trader will receive is ₹4000 (80 x ₹50). But, with this strategy, the losses will also be limited to ₹4000.
The Leverage payoff schedule and the payoff schedule and the payoff chart are listed below. The commission charges have not been considered in the calculation.
On the expiry date, the Nifty closes at
Net payoff from selling the call option (₹9300)
Net payoff from buying the call option (₹9400)
Net payoff
8900
₹105
₹55 (loss)
₹50
9000
₹105
₹55 (loss)
₹50
9100
₹105
₹55 (loss)
₹50
9200
₹105
₹55 (loss)
₹50
9300
₹105
₹55 (loss)
₹50
9350
₹55
₹55 (loss)
₹0
9400
₹5
₹55 (loss)
₹50 (loss)
9500
₹95 (loss)
₹45
₹50 (loss)
How Can You Exit the Bear Call Spread Option Strategy?
There are two ways in which you can exit the bear spread call option strategy:
You can wait for the options to expire so that you can keep the premium for yourself.
You can also reverse the position you have taken by selling the call that you have bought and buying the call that you have sold.
Advantages of Bear Call Spread Option Strategy
The advantage of this strategy is that loss is limited because you have taken both short and long positions.
If you can benefit from the time value, you can use this strategy, and it will provide you with an immediate return on your investment.
Disadvantages of Bear Call Spread Option Strategy
You have to choose the right strike price in this strategy. If the strike price you have chosen is very close to the stock price, you are at risk of losing money.
If the stock price falls exponentially, you will make limited returns. Whereas if you were not using this strategy, you would have made significant returns in this case.
Conclusion
The bear call spread option strategy is a limited risk and limited return strategy. It is applicable accurately when the trader has a neutral or bearish view of the underlying assets in the market. The strategy is advantageous because, as a trader, you have the chance to earn higher profits with limited risk. Before you use the strategy, it is advisable to study the market and do an analysis so that you do not have to incur losses on the trade. Also Read: Bear Put Spread Strategy
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Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.
Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.
Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
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