What is Bear Call Spread Option Strategy?

• A bear call spread option strategy, also known as a "short call spread," is a strategy that involves selling a call option at a lower strike price and buying a call option at a higher strike price with the same expiration date (Mostly ITM and ATM Respectively). This creates a spread where the maximum potential profit is limited to the premium received from selling the lower strike price minus premium paid for buying higher strike price, and the maximum potential loss is limited to the difference between the strike prices minus the premium received.
  
  This strategy is considered a bearish strategy because it profits when the price of the underlying price decreases. If the price of the underlying falls below the strike price of the short call option, both options will expire worthless, and the investor will keep the premium received as profit. If the price of the underlying security rises above the strike price of the long call option, the investor will lose money, but the loss will be limited to the difference between the strike prices minus the premium received.

When to Execute Bear Call Spread Option Strategy?

• A bear call spread option strategy is executed when an investor expects the price of the underlying security to decrease. If the investor expects the market to decline, they can use a bear call spread to profit from the decline while limiting their potential loss.

What is the Trade?

• A Bear call credit spread consists of one short call with a lower strike price and one long call with a higher strike price. Both calls have the same underlying stock and the same expiration date.
  
  Breakeven for Bear Call Spread
  Breakeven point = Sold Call Strike Price + net premium received.

What will be maximum profit?

• Maximum reward is limited to the difference between two strikes i.e., net capital inflow. Trader will earn maximum profit underlying closes below the sold strike price as both option will become OTM and expires worthless trade will keep the net credit.

What will be maximum loss?

• Maximum risk is the difference between both the strikes minus credit inflow received initially. Maximum loss arises when stock closes above higher strike Call. This is net credit strategy so in any circumstances loss will be limited.

What are the advantages?

• Maximum risk is the difference between both the strikes minus credit inflow received initially. Maximum loss arises when stock closes above higher strike Call. This is net credit strategy so in any circumstances loss will be limited.
  Reduced cost: Bear call Spread is the limited risk and limited reward strategy which incurs less margin.
  Reduced volatility: Since the strategy involves both buying and selling options, it can help to reduce the overall volatility of a portfolio.
  Bear call strategy is good for when trader is moderately bearish about the market.

What are the disadvantages?

• Bear call credit spread maximum potential profit is limited to the difference between the strike prices of the call options minus the premium paid for the higher strike price. Since the options have the same expiration date, the strategy can only be implemented for a specific time period and may not be suitable for longer-term market movements.
  Limited earning potential: The earning potential is limited because it's a directional strategy which include one long option and one short option.

Breakeven for Bear Call Spread

• Breakeven point = Sold Call Strike Price + net premium received.

Example for Bear Call Spread:

• An example of a bear call spread strategy would be as follows:
  
  An investor believes that the price of Nifty will decrease in the next week and trading at 17925.
  They purchase a call option with a strike price of 18000 for a premium of 120 per share.
  They also sell a call option with a strike price of 17700 for a premium of 300 per share.
  The expiration date for both options is in one week.
  If the price of Nifty stock decreases to 17700 at expiration, both options will expire worthless, and the investor will have a profit of 180 point i.e., 9000.
  If the price of Nifty stock increases to above 18000 at expiration will resulting in a loss of 120 i.e.6000

Impact of Delta on Bear Call Spread

• The impact of delta on a bear call spread strategy option trading can be summarized as follows:
  As the underlying asset's price decreases, the bear call spread will make a profit, and as the underlying asset's price increases, the bear call spread will make a loss. The delta of the options will change as the underlying asset's price changes, which will impact the profit or loss of the strategy.

Impact of time on bear call spread

• Since a bear call spread strategy is made up of one short call and one long call, the sensitivity to time erosion depends on the relationship of the stock price to the strike prices of the spread.
  Theta has a negligible effect of bear call spread as this is net credit strategy the loss of theta is known since inception of the strategy, bear call spread is mostly affect by delta as it a directional strategy.

Impact of Volatility on Bear Call Spread

• Since a bear call spread consists of one short call and one long call, the price of a bear call spread changes very little when volatility changes and other factors remain constant. Vega also have negligible effect on bear call spread option trading.