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  • Bear Call Spread

Bear Call Spread

  • Posted by Abhilash Bandari
  • Date December 23, 2020
  • Bear call spread is an option strategy used by traders to cap their maximum loss.
  • At first, a trader is bearish with the downside capped, so he initiates a sell call option, i.e., the spot price is higher than the strike price.
  • In a sell call option, maximum profit is fixed, which is equal to the premium received and the maximum loss is unlimited.
  • If the price falls as he expects, the maximum profit will be the premium received.
  • However, the trader later observes a support level at the bottom and expects the trend to be bullish.
  • Suppose the trader’s worry became true and the price started to revert back from the support. The trader will fall into huge loss.
  • To reduce his loss, he initiated a buy call option, such that the strike price of the buy call option is more than the strike price of the sell call option.
  • In this case, the trader receives a higher premium for the sell call option than he pays to the buy call option.
  • If the price falls, the trader would incur a profit in the sell call option but at the same time incur a loss in the buy call option.
  • Since the gain is higher than the loss, the profit is now limited and it is equal to the difference between the premium received and the premium paid.
  • If the price rises, the trader would incur a loss in the sell call option but at the same time incur a profit in the buy call option. Since the loss is higher than the gain, the loss is now limited.
  • This way, the trader reduced his maximum loss, from unlimited to limited.

 

Consider an example: a trader initiated a bear call spread option strategy

Short Call: Strike Price = 1000 & Premium Received = 40

Long Call: Strike Price = 1050 & Premium Paid = 30

P/L = Profit/Loss

The graph clearly depicts the difference between a sell call option and a bear call spread option.

In the second strategy, the maximum loss is limited.

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Abhilash Bandari

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Bajaj Electricals Limited is engaged in engineering and projects; power distribution, illumination and consumer durables businesses.

It has a range of domestic and kitchen appliances comprising water heaters, room heaters, coolers, irons, mixers, induction cookers, toasters, kettles, microwave, rice cookers, gas stoves, non-electrical kitchen aids and pressure cookers.

It offers ceiling, table, pedestal, wall, fresh air and industrial fans, and lighting solutions, such as light sources, light emitting diode-based lighting products, domestic luminaires, torches and lanterns.

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The Company's business segments consist of

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The Lighting segment includes lamps, tubes and luminaries.

The Consumer Durables segment includes appliances and fans.

The Engineering & Projects segment includes transmission line towers, telecommunications towers, highmast, poles and special projects.

The Others segment includes diecasting and wind energy.

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