Bear Call Spread
What Is a Bear Call Spread?
A bear call spread, or a bear call credit spread, is a type of options strategy utilized when an options trader expects a decline in the price of the underlying asset. A bear call spread is accomplished by purchasing call options at a specific strike price while likewise selling similar number of calls with a similar expiration date, yet at a lower strike price. The maximum profit to be acquired utilizing this strategy is equivalent to the credit received while starting the trade.
A bear call spread is likewise called a short call spread. It is viewed as a limited-risk and limited-reward strategy.
Advantages of a Bear Call Spread
The principal advantage of a bear call spread is that the net risk of the trade is diminished. Purchasing the call option with the higher strike price assists offset the risk of selling the call option with the lower strike price. It conveys undeniably less risk than shorting the stock or security since the maximum loss is the difference between the two strikes diminished by the amount received, or credited, when the trade is initiated. Selling a stock short theoretically has unlimited risk if the stock moves higher.
On the off chance that the trader accepts the underlying stock or security will fall by a limited amount between the trade date and the expiration date then, at that point, a bear call spread could be an optimal play. In any case, in the event that the underlying stock or security falls by a greater amount, the trader provides up the ability to claim that extra profit. It is a trade-off among risk and potential reward that is interesting to numerous traders.
Illustration of a Bear Call Spread
We should expect that a stock is trading at $45. An options trader can utilize a bear call spread by purchasing one call option contract with a strike price of $40 and an expense/premium of $0.50 ($0.50 * 100 shares/contract = $50 premium) and selling one call option contract with a strike price of $30 for $2.50 ($2.50 * 100 shares/contract = $250). In this case, the investor will receive a net credit of $200 to set up this strategy ($250 - $50). If the price of the underlying asset closes below $30 upon expiration, then the investor will understand a total profit of $200, or the full premium received.
The profit from the bear call spread in this manner maxes out on the off chance that the underlying security closes at $30 — the lower strike price — at expiration. On the off chance that it closes farther below $30 there won't be any extra profit. In the event that it closes between the two strike prices there will be a marked down profit, while shutting over the higher strike, $40, will bring about a loss of the difference between the two strike prices discounted by the amount of the credit received at the onset.
- Max profit = $200 (the credit)
- Max loss = $800 (the 10 points between the spread strikes x100, minus the initial credit received)
- Bear call spreads are settled on by purchasing two decision options, one long and one short, at various strike prices however with a similar expiration date.
- Bear call spreads are viewed as limited-risk and limited-reward since traders can contain their losses or acknowledge diminished profits by utilizing this strategy. The limits of their profits and not entirely set in stone by the strike prices of their call options.