A Bear Call Spread is a 2 leg Option strategy that is used when the overall outlook of the underlying asset is slightly bearish. As it is a Net credit strategy, It is used when the Call option premiums are attractive. The total Profit and loss are capped in this strategy.
Bear call Spread-
A Bear Call Spread is a multi-leg Option Strategy where 2 call options are involved of the same expiry and of the same underlying asset. This strategy is implemented when the view of the underlying asset is moderately bearish and not extremely bearish.
When to use it-
This strategy is used when the view on the underlying asset (Stock/Index) is slightly bearish and the Option Premiums especially the Call option premiums appear to be more attractive than the Put option premiums.
This is also a Net Credit strategy hence the maximum Credit (Total Premium collected) is the total maximum profit in this strategy.
Now to Implement a Bear Call Spread the following options have to be executed-
- Buy 1 OTM (Out of The Money) Call option.
- Sell 1 ITM (In The Money) Call option.
Some things to ensue while implementing this Strategy-
- All the Strike Prices should be of the same underlying asset.
- Both the Call options should be of the same expiry.
- The Ratio of Call options Sold should be equal to the call options Bought (1:1) {If you sell 2 Call options then 2 Call options of the same Stock/Index have to be Bough}
Let’s see an example of how to implement this strategy-
Let’s assume the LTP (Last Traded Price) of Nifty is 15000 and the outlook for Nifty is slightly bearish for the upcoming days and the Call option premiums are high, hence a Bear Call Spread strategy can be implemented in this case.
To implement this strategy the following orders have to be executed-
- Buy 1 15250 OTM (Out of The Money) Call Option @10rs
- Sell 1 14800 ITM ( In The Money) Call option @ 200rs
Looking at the above implementation the following points can be calculated-
-
Total Spread ( Difference between the 2 option prices) (15250-14800)=450
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Maximum Profit- As this is Net credit strategy, therefore, the total Credit Will be our maximum potential profit which is (200-10) =190
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The maximum loss- (Total Spread-Net Credit) (450-190)=260
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Break-even= (Lower Strike- Net Credit) (14800-190) =14610
The maximum profit and maximum loss payout are charted on the diagram above.
To conclude the Bear Call Spread strategy is a Net credit strategy that is to be implemented when the overall outlook of the underlying asset is moderately bearish.
This is to be used when the call option premiums appear to be more attractive than the Put option premiums. The Maximum Profit and Loss is capped in this strategy making it ideal for risk-averse traders and is a better option than Naked options strategies.