Options Trading Strategies Bear Call Spread

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Options Trading Strategies

Bear Call Spread

Bear Call Spread option trading strategy is used by a trader who is bearish in nature and expects the underlying asset to dip in the near future. This strategy includes buying of an ‘Out of the Money’ Call Option and selling one ‘In the Money’ Call Option of the same underlying asset and the same expiration date.

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When you write a call, you receive premium thereby reducing the cost for buying of OTM Call Option. This strategy is also called as ‘Bear Call Credit Spread’ as your account gets credited at the time of entering the positions.

A bear call 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.

The Bear Call Spread is a two leg spread strategy traditionally involving ITM and OTM Call options. However you can create the spread using other strikes as well. Do remember, the higher the difference between the two selected strikes (spread), larger is the profit potential.

The bear call spread is an options strategy that works by letting the options decay slowly day after day until the expiration date, resulting in both options expiring worthless and the investor and keeping the entire premium.

The most an investor can expect to make on this trade is the credit or premium they received. If the stock finishes below the lower strike price at expiration, the investor will achieve maximum profit.

This is a great strategy to use if the investor feels a stock is moving sideways lower, but not sure on their timing or wants to giving themselves a cushion in case the market moves sideways or trades up slightly.

Breakeven: Break-even at expiration is short call strike + net premium received.

Risk: Limited

Reward: Limited, maximum potential profit is limited to the net credit (premium) received.

Action

Sell 1 ‘In the Money’ Call Option

Buy 1 ‘Out of the Money’ Call Option

Bear Call Spread Example

Suppose that the NIFTY is trading around 11400 level, and Mr. G enters into Bear-Call-Spread strategy. The Lot Size of NIFTY is 75.

He sells one 11300 ITM Call Option for Rs. 200 and buys one 11600 OTM Call Option for a premium of Rs. 40. His account will be credited by Rs 12000. ((200-40)*75).

Here’s a look at the payout diagram at expiration with results.