Covered Call Vs Bear Put Spread Options Trading Strategy Comparison

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

Covered Call Vs Bear Put Spread

	Covered Call	Bear Put Spread


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.	The Bear Put strategy involves selling a Put Option while simultaneously buying a Put option. Contrary to Bear Call Spread, here you pay the higher premium and receive the lower premium. So there is a net debit in premium. Your risk is capped at the difference in premiums while your profit will be limited to the difference in strike prices of Put Option minus net premiums. 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 put debit spread as a net debit is taken upon entering the trade. This strategy has a limited risk as well as limited rewards. How to use the bear put spread options strategy? The bear put spread strategy looks like... Read More
Market View	Bullish	Bearish
Strategy Level	Advance	Advance
Options Type	Call + Underlying	Put
Number of Positions	2	2
Risk Profile	Unlimited	Limited
Reward Profile	Limited	Limited
Breakeven Point	Purchase Price of Underlying- Premium Recieved	Strike Price of Long Put - Net Premium

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

	Covered Call	Bear Put 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 drop.
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 ITM Put Option Sell OTM Put Option
Breakeven Point	Purchase Price of Underlying- Premium Recieved	Strike Price of Long Put - Net Premium The breakeven point is achieved when the price of the underlying is equal to strike price of long Put minus net premium.

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

	Covered Call	Bear Put 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 is limited to net premium paid. It occurs when the price of the underlying is less than strike price of long Put.. Max Loss = Net Premium Paid.
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 is achieved when the strike price of short Put is greater than the price of the underlying.. Max Profit = Strike Price of Long Put - Strike Price of Short Put - Net Premium Paid.
Maximum Profit Scenario	Underlying rises to the level of the higher strike or above.	Underlying goes down and both options exercised
Maximum Loss Scenario	Underlying below the premium received	Underlying goes up and both options not exercised

Pros & Cons or Covered Call and Bear Put Spread

	Covered Call	Bear Put 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.	Risk is limited. It reduces the cost of investment.
Disadvantage	Unlimited risk for limited reward.	The profit is limited.
Simillar Strategies	Bull Call Spread	Bear Call Spread, Bull Call Spread

Comments

Add a public comment...

Compare