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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
Covered Call Logo Bear Put 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. 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







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