Explanation
Bear call spread strategy is used when an options trader expects a fall in the price of the underlying security. Executing a Bear Call Spread entails selling an equal number of In-the-money (ITM) calls and going long on out-the-money (OTM) call options. Both calls have the same underlying stock and the same expiration date. When a call option is sold, it paves the way for unlimited upside risk, to counter the risk OTM call is bought. A bear call spread is established for a net credit. Maximum profit is earned when the underlying price fall as per the expectation of the trader and he gets a chance to keep the new premium.
Risk
Limited
Reward
Limited
Construction
Buy 1 OTM Call Option
Sell 1 ITM Call Option
Payoff Chart
| Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
| CALL | 29/03/2023 | 16950.0 | 294.8 | Sell | 1 |
| CALL | 29/03/2023 | 17150.0 | 159.05 | Buy | 1 |
| Market Expiry | Payoff 1 | Payoff 2 | Net Premium | Option Payoff at expiry |
| 16750.0 | 0.0 | 0.0 | 135.75 | 135.75 |
| 16800.0 | 0.0 | 0.0 | 135.75 | 135.75 |
| 16850.0 | 0.0 | 0.0 | 135.75 | 135.75 |
| 16900.0 | 0.0 | 0.0 | 135.75 | 135.75 |
| 16950.0 | 0.0 | 0.0 | 135.75 | 135.75 |
| 17000.0 | -50.0 | 0.0 | 135.75 | 85.75 |
| 17050.0 | -100.0 | 0.0 | 135.75 | 35.75 |
| 17100.0 | -150.0 | 0.0 | 135.75 | -14.25 |
| 17150.0 | -200.0 | 0.0 | 135.75 | -64.25 |
| 17200.0 | -250.0 | 50.0 | 135.75 | -64.25 |
| 17250.0 | -300.0 | 100.0 | 135.75 | -64.25 |
| 17300.0 | -350.0 | 150.0 | 135.75 | -64.25 |
| 17350.0 | -400.0 | 200.0 | 135.75 | -64.25 |
| 17400.0 | -450.0 | 250.0 | 135.75 | -64.25 |
| 17450.0 | -500.0 | 300.0 | 135.75 | -64.25 |
| 17500.0 | -550.0 | 350.0 | 135.75 | -64.25 |
| 17550.0 | -600.0 | 400.0 | 135.75 | -64.25 |
Option Trading Example
Suppose that NIFTY is trading around 17000 levels, and a trader with a bearish outlook enters into a Bear-Call-Spread strategy. He buys one 17150 out-of-the-money (OTM) Call Option for a premium of Rs. 160 and sells one 16950 in-the-money (ITM) Call Option for Rs. 295. His account will be credited by Rs 6750. [(295-160) *50]
Scenario 1:
At expiry, if the trader's expectation comes true and nifty starts to trade below the breakeven point, the trader in that scenario will be allowed to keep the premium received.
Scenario 2:
At expiry, if the market takes a wild move on the upside and Nifty closes at the 17250 level, the trader would then make losses on the short call position but would partially be compensated by the long call option position. The loss amount would be limited but would be Rs. 8000.
Loss = Loss on short call + Gain on long call option
3250 = {(-17250 + 16950 + 295) + (17250 – 17150 - 160)} *50]
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