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Bear Call Spread Options Trading Strategy Explained

Published on Wednesday, April 18, 2018 | Modified on Wednesday, June 5, 2019

Bear Call Spread

Bear Call Spread Options Strategy

Strategy LevelBeginners
Instruments TradedCall
Number of Positions2
Market ViewBearish
Risk ProfileLimited
Reward ProfileLimited
Breakeven PointStrike Price of Short Call + Net Premium Received

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 spread strategy looks like as below for NIFTY which is currently traded at ₹10400 (NIFTY Spot Price):

Bear Call Spread Orders - NIFTY
OrdersNIFTY Strike Price
Buy 1 OTM CallNIFTY18APR10600CE
Sell 1 ITM CallNIFTY18APR10200CE

Suppose NIFTY shares are trading at 10400. If we are expecting the price of NIFTY to go down in near future, we sell 1 ITM NIFTY Call and buy 1 OTM NIFTY Call.

The trader receives a higher premium for selling a Call while paying the lower premium for buying a Call. If the NIFTY goes down, trader keeps the net premium received which is also the maximum profit.

If the price of Nifty rises, your loss will be limited to the difference between two strike prices minus the net premium received at the time of entering into the strategy.

When to use Bear Call Spread strategy?

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.

Example

Example 1 - Stock Options:

Let's take a simple example of a stock trading at ₹37 (spot price) in June. The option contracts for this stock are available at the premium of:

  • July 40 Call - ₹1
  • July 35 Call - ₹3

Lot size: 100 shares in 1 lot

  1. Buy July 40 Call: 100*1 = ₹100 Paid
  2. Sell July 35 Call: 100*2 = ₹300 Received

Net Credit: ₹100 + ₹300 = ₹200

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at ₹37

  • July 40 Call - Expires worthless
  • July 35 Call - Expires worthless
  • Net credit was ₹200 which was received as net premium for Call position.
  • Total proft = ₹200

The total profit of ₹200 is also the maximum profit in this strategy. This is the amount you paid as premium at the time you enter in the trade.

Scenario 2: Stock price goes up to ₹42

  • Buy July 40 Call Expires in-the-money with an intrinsic value of (42-40)*100 = ₹200
  • Sell July 35 Call Expires in-the-money with an intrinsic value of (35-42)*100 = -₹700
  • Net credit was ₹200 which was received as net premium.
  • Total Loss = -700 + 200 + 200 (Premium Received) = -₹300

In this scenario, we lost total ₹300 which is also the maximum loss in this strategy.

Scenario 3: Stock price goes down to ₹30

Same as scenario 1:

  • July 40 Call - Expires worthless
  • July 35 Call - Expires worthless
  • Net credit was ₹200 which was received as net premium for Call position.
  • Total proft = ₹200

Example 2 - Bank Nifty

Bear Call Spread Example Bank Nifty
Bank Nifty Spot Price8900
Bank Nifty Lot Size25
Bear Call Spread Options Strategy
Strike Price(₹)Premium(₹)Total Premium Paid(₹)
(Premium * lot size 25)
Buy 1 OTM Call900040010000
Sell 1 ITM Call880050012500
Net Premium (500-400)1002500
Breakeven(₹)Strike price of the Ssort Call + Net Premium
(8800 + 100)
8900
Maximum Possible Loss (₹)(Strike Price of Long Call - Strike Price of Short Call - Net Premium Received) * Lot Size
(9000-8800-100)*25
2500
Maximum Possible Profit (₹)Net Premium Received * Lot Size
(100)*25
2500
On Expiry Bank NIFTY closes atNet Payoff from 1 ITM Call Sold (₹) @8800Net Payoff from 1 OTM Call Brought (₹) @9000Net Payoff (₹)
850012500-100002500
870012500-100002500
890010000-100000
91005000-7500-2500
93000-2500-2500
bear call spread example bank nifty

Market View - Bearish

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

Actions

  • 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

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.

Risk Profile of Bear Call Spread

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

Reward Profile of Bear Call Spread

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

Max Profit Scenario of Bear Call Spread

Underlying goes down and both options not exercised

Max Loss Scenario of Bear Call Spread

Underlying goes up and both options exercised

Advantage of Bear Call Spread

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 of Bear Call Spread

Limited profit potential.

How to exit?

  • Wait for Options to expire and retain premium.
  • Reverse you position by buying back the sold Call and selling the bought Call.

Simillar Strategies

Bear Put Spread, Bull Call Spread

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