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Options Strategy – Bear Call Spread


A Bear Call Spread, also known as a Short Call Spread, is an options trading strategy used when a trader expects a moderate decline or neutral movement in the price of the underlying asset. This strategy involves selling a call option at a lower strike price while simultaneously buying another call option at a higher strike price, both with the same expiration date. The goal is to generate a net credit (premium received minus premium paid) while limiting potential losses.

  • Market Direction: Bearish
  • Difficulty: Intermediate
bear call spread options trading strategy

How It Works

  1. Sell a Call Option: The trader sells a call option with a lower strike price.
  2. Buy a Call Option: The trader buys a call option with a higher strike price.
  3. Market Movement: The trader benefits if the price of the underlying asset remains below the lower strike price.
  4. Profit and Loss: The maximum profit is the net credit received, and the maximum loss is the difference between the strike prices minus the net credit.

Example of a Bear Call Spread Strategy

Let’s say you expect the stock price of Company ABC, currently trading at $50, to decline or stay below $55. You decide to implement a Bear Call Spread with the following specifics:

  • Sell Call Option: Strike Price $55, Premium Received $3 per share
  • Buy Call Option: Strike Price $60, Premium Paid $1 per share
  • Expiration Date: 1 month from now

You trade one call option contract, which represents 100 shares, so your net credit is:

100 shares×($3−$1)=$200100 \text{ shares} \times (\$3 – \$1) = \$200100 shares×($3−$1)=$200

Scenarios

  1. Stock Price Remains Below Lower Strike Price ($55)
    If, at expiration, the stock price remains at $50 or falls:
    • Both call options expire worthless.
    • Keep the Net Credit: You keep the $200 net credit.
    • Net Profit: $200 (net credit received).
  2. Stock Price Rises Above Higher Strike Price ($60)
    If, at expiration, the stock price rises to $65:
    • The sold call option is exercised.
    • Loss on Sold Call: $65 (market price) – $55 (strike price) = $10 per share.
    • Gain on Bought Call: $65 (market price) – $60 (strike price) = $5 per share.
    • Net Loss: $10 – $5 = $5 per share.
    • Total Loss: $5 \times 100 = $500.
    • Adjusted Loss: $500 – $200 (net credit) = $300.
  3. Stock Price Between $55 and $60
    If, at expiration, the stock price is between $55 and $60:
    • The sold call option is exercised.
    • Gain on Sold Call: $55 (strike price) – $50 (market price) = $5 per share.
    • Loss on Bought Call: $60 (strike price) – $55 (market price) = $5 per share.
    • Break-even Point: The trader neither gains nor loses additional money beyond the initial net credit.

Benefits of Bear Call Spread

  • Income Generation: Provides income from the net credit received.
  • Limited Risk: The potential loss is capped by the higher strike price of the bought call option.
  • Bearish to Neutral Outlook: Profits if the stock price declines or remains steady.

Risks of Bear Call Spread

  • Limited Profit: The maximum profit is limited to the net credit received.
  • Potential Loss: Losses can occur if the stock price rises above the higher strike price.

The Bear Call Spread strategy is an effective way to capitalize on a bearish or neutral outlook with limited risk and defined potential profit.

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