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Bear Call Spread Option Strategy

Bear Call Spread Option Strategy

What is Bear Call Spread Option Strategy?

  • Bear Call Spread is a limited risk to limited reward strategy. Bear call Spread is a moderate bearish strategy as we expect underlying fall in near term, Bear call spread is net credit strategy as we are selling the lower strike call and buying the higher strike call. We have bought a higher strike call to neutralise the effect of short call in case of sharp fall.

When to Execute?

  • Bear Call spread is executed when we have bearish outlook in Stock/ Index in near term. Instead of selling naked calls with higher outflow, one buys higher strike calls to neutralise the effect of sharp crash and it results in hedged strategy. Identifying a clear down trend is essential for the strategy, specifically can be implemented on breakdown which helps to get the momentum, on the other hand risk is limited and will not hurt much if breakout fails to materialise. Ideal scenario to execute bear call spread is when we are expecting gradual fall in price till the sold strike price, then both the premium will become zero.

What is the Trade?

  • Buy one lot (At-The-Money) ATM Call and Sell one lot In-the-Money (ITM) Call. Both the Call should be of the same underlying and expiration.

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. Maximum Profit arises if the stock closes at or below the lower strike Call resulting in both the strike ending worthless and you pocket the entire initial inflow.

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.

What are the advantages?

  • Helps to generate sustain income if the view goes correct. Can be used to repair loss making Long Call by selling lower ITM Call. Develop Limited risk, limited reward strategy.

What are the disadvantages?

  • Identifying clear areas of support and resistance is essential. If the stock closes above higher strike Call, one can lose money.

Example for Bear Call Spread:

  • Nifty future price is 15500. A Bear Call Spread can be devised by adding one lot of 15500 CE At-the-Money (ATM) @100 and selling one lot of 15200 CE (ITM) @ 300. Net Premium Paid or Received = Rs. (+200). Maximum profit below 15200 =200. i.e., difference between = +300 – 100 (net premium received). Maximum Loss = -100