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Covered Call Vs Bear Call Spread Options Trading Strategy Comparison

Compare Covered Call and Bear Call Spread options trading strategies. Find similarities and differences between Covered Call and Bear Call Spread strategies. Find the best options trading strategy for your trading needs.

Covered Call Vs Bear Call Spread

  Covered Call Bear Call Spread
Covered Call Logo Bear Call Spread Logo
About Strategy A Covered Call is a basic option trading strategy frequently used by traders to protect their huge share holdings. It is a strategy in which you own shares of a company and Sell OTM Call Option of the company in similar proportion. The Call Option would not get exercised unless the stock price increases. Till then you will earn the Premium. This a unlimited risk and limited reward strategy. Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income. A Bear Call Spread strategy involves buying a Call Option while simultaneously selling a Call Option of lower strike price on same underlying asset and expiry date. You receive a premium for selling a Call Option and pay a premium for buying a Call Option. So your cost of investment is much lower. The strategy is less risky with the reward limited to the difference in premium received and paid. This strategy is used when the trader believes that the price of underlying asset will go down moderately. This strategy is also known as the bear call credit spread as a net credit is received upon entering the trade. The risk and reward both are limited in the strategy. How to use the bear call spread options strategy? The bear call spr... Read More
Market View Bullish Bearish
Strategy Level Advance Beginners
Options Type Call + Underlying Call
Number of Positions 2 2
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point Purchase Price of Underlying- Premium Recieved Strike Price of Short Call + Net Premium Received

When and how to use Covered Call and Bear Call Spread?

  Covered Call Bear Call Spread
When to use?

The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future.

The bear call spread options strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.

Market View Bullish

When you are expecting a moderate rise in the price of the underlying or less volatility.

Bearish

When you are expecting the price of the underlying to moderately go down.

Action
  • Buy Underlying
  • Sell OTM Call Option

Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.

  • Buy OTM Call Option
  • Sell ITM Call Option

Let's assume you're Bearish on Nifty and are expecting mild drop in the price. You can deploy Bear Call strategy by selling a Call Option with lower strike and buying a Call Option with higher strike. You will receive a higher premium for selling a Call while pay lower premium for buying a Call. The net premium will be your profit. If the price of Nifty rises, your loss will be limited to difference between two strike prices minus net premium.

Breakeven Point Purchase Price of Underlying- Premium Recieved
Strike Price of Short Call + Net Premium Received

The break even point is achieved when the price of the underlying is equal to strike price of the short Call plus net premium received.

Compare Risks and Rewards (Covered Call Vs Bear Call Spread)

  Covered Call Bear Call Spread
Risks Unlimited

Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying.

Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received

Limited

The maximum loss occurs when the price of the underlying moves above the strike price of long Call.

Maximum Loss = Long Call Strike Price - Short Call Strike Price - Net Premium Received

Rewards Limited

You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option.

Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received

Limited

The maximum profit the net premium received. It occurs when the price of the underlying is greater than strike price of short Call Option.

Max Profit = Net Premium Received - Commissions Paid

Maximum Profit Scenario

Underlying rises to the level of the higher strike or above.

Underlying goes down and both options not exercised

Maximum Loss Scenario

Underlying below the premium received

Underlying goes up and both options exercised

Pros & Cons or Covered Call and Bear Call Spread

  Covered Call Bear Call Spread
Advantages

It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.

It allows you to profit in a flat market scenario when you're expecting the underlying to mildly drop, be range bound or marginally rise.

Disadvantage

Unlimited risk for limited reward.

Limited profit potential.

Simillar Strategies Bull Call Spread Bear Put Spread, Bull Call Spread







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