Bear Call Spread | How We Trade Bear Call Spread?
Bear Call Spread
How we trade
• Bear Call Spread
Bear Call Spread is a strategy that must be devised when the investor is moderately bearish on the market direction and is expecting the underlying to fall in the short-term.
A Bear Call Spread is formed by buying an “Out-of-the-Money Call Option” (higher strike) and selling an “In-the-Money Call Option” (lower strike). Both Call options must have the same underlying security and expiration month.
The investor receives a net credit because the Call bought is of a higher strike price than the Call sold.
The concept is to protect the downside of a Call sold by buying a Call of a higher strike price to insure the
Call sold.
Investor view: Moderately bearish on the Stock/ Index.
Risk: Limited.
Reward: Limited to the net premium received.
Breakeven: Strike price of Short Call + premium received.
Illustration
E.g.. Nifty is currently trading @ 15000. Investor is expecting the markets to fall down drastically from these levels. So, by selling a Call option of Nifty having Strike 14900 @ premium 200 and buying a Call option of Nifty having Strike 15100 @ premium 50, the investor can get an inflow of the premium of RS 150 and benefit if Nifty stays below 15000.
Strategy | Stock /Index | Type | Strike | Premium |
Bear Call Spread | NIFTY (Lot size 75) | Sell Call | 14900 | 200 Inflow |
Buy Call | 15100 | 50 Outflow |
Payoff Schedule
CMP | SELL 14900 | BUY 15100 | NET FLOW | LOT SIZE | P&L |
CALL @ 200 | CALL @ 50 | ||||
14400 | 200 | -50 | 150 | 75 | 11250 |
14500 | 200 | -50 | 150 | 75 | 11250 |
14600 | 200 | -50 | 150 | 75 | 11250 |
14700 | 200 | -50 | 150 | 75 | 11250 |
14800 | 200 | -50 | 150 | 75 | 11250 |
14900 | 200 | -50 | 150 | 75 | 11250 |
15000 | 100 | -50 | 50 | 75 | 3750 |
15100 | 0 | -50 | -50 | 75 | -3750 |
15200 | -100 | 50 | -50 | 75 | -3750 |
15300 | -200 | 150 | -50 | 75 | -3750 |
15400 | -300 | 250 | -50 | 75 | -3750 |
15500 | -400 | 350 | -50 | 75 | -3750 |
Payoff Schedule
In the above chart, the breakeven happens the moment Nifty crosses 15050 and risk is limited to a maximum of 3750 (calculated as Lot size * Premium received).
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