Bear Call Spread Option - A Detailed Guide | Espresso

Bear Call Spread Option Strategy Explained

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.

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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.

Bear Call Spread Example

NIFTY

9300

Sell ATM Call Strike Price

₹9300

Received premium

₹105

Buy OTM Call Strike Price

₹9400

Premium paid

₹55

BEP (Break-Even Point)

₹9350

Lot Size

80

Net Premium (Received)

₹50

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 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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Frequently Asked Questions

A bear call spread strategy involves a bearish option strategy in which a trader purchases a call option while selling a call option with a lower strike at the same time on the same expiry date and the same underlying asset.

The bear spread call option has limited risk, so you can hold your positions overnight. You will be saved from incurring unlimited losses with this strategy.

Every trade carries some amount of risk, but the bear spread call option strategy is safer because there is limited risk. So, even if you incur losses, it will be up to a certain amount.

The break-even point is achieved when the sum of the price of the short call and the net premium received is equal to the price of the underlying asset.