• Home
  • Courses
    • NSE Academy Certified Courses
      • Capital Market Analytics
      • Certified Program on Intraday Trading Strategies
      • Advanced Technical Analysis
      • Advanced Options
      • Advanced Algo Trading
      • Advanced Fundamental Analysis
      • Advanced Risk Management
      • Algorithmic Trading & Computational Finance using Python & R
    • TC Courses
      • FSM 1.0
      • FSM 2.0
      • Mentorship Program
  • Learning Center
    • Financial Education
    • IPO Issues
    • Fundamental Analysis
    • Technical Corner
    • Options Corner
    • Risk Management
  • Screener
  • Emerging Leaders
  • Terminal
  • Subscribe
Have any question?
7718989954
info@tradingcampus.in
Seminar on live trading strategy (Seminar on live trading strategy (11th Feb 2023, 11 am)
Login
Trading CampusTrading Campus
  • Home
  • Courses
    • NSE Academy Certified Courses
      • Capital Market Analytics
      • Certified Program on Intraday Trading Strategies
      • Advanced Technical Analysis
      • Advanced Options
      • Advanced Algo Trading
      • Advanced Fundamental Analysis
      • Advanced Risk Management
      • Algorithmic Trading & Computational Finance using Python & R
    • TC Courses
      • FSM 1.0
      • FSM 2.0
      • Mentorship Program
  • Learning Center
    • Financial Education
    • IPO Issues
    • Fundamental Analysis
    • Technical Corner
    • Options Corner
    • Risk Management
  • Screener
  • Emerging Leaders
  • Terminal
  • Subscribe

Options Corner

  • Home
  • Blog
  • Options Corner
  • Bear Call Spread

Bear Call Spread

  • Posted by Trading Campus
  • Date June 10, 2017
  • Comments 31 comments

Underlying Strategy

(Moderately Bearish)(Bearish with a downside target)

When a trader is moderately bearish on the instrument and has a specific target for the price.

 Methodology

The trader buys a CE of a strike price at which she believes the stock shall close below at the time of expiry and sells a CE of a lower strike price at which she expects the price to hit a support level.

As the short CE has a higher cost than the long CE, we collect a net premium.The net premium rreceived is(Cost of Short CE-Cost of Long CE ).

However this strategy gives a limited maximum profit, even if the the stock goes outright bearish.

Risk Profile:

This is a low risk low profit setup as the loss is limited but the max profit is also capped.The strategy has a pretty good risk-reward ratio in moderately bearish markets.

Margin requirements are high as you are selling a CE.

Calculations:

Max Potential Profit: Net premium received

When: The stock crosses the lower strike price at the time of expiry.

Max Potential Loss: (Strike of Short CE-strike of Long CE)-Net premium received

When: The stock is above the higher strike price at the time of expiry.

 

Price of Breakeven at expiration : Short CE strike+Net premium received

 Impact with passage of time

The Long CE price has a negative time value while the short CE has a positive time value.

However the short CE will have a faster time decay than the Long CE.

Hence the net effect of time decay is slightly positive.

Note that the payoff graphs of Bear Call Spread and Bear Put Spread are same, but time decay works in favor of the Bear Call spread.

Illustration:

For example, the trader believes that Crude Oil prices are in the overbought zone and  would fall in the short term and hence has a moderately bearish outlook on ONGC.

In order to catch the small fall in the price of the stock, he can buy a naked Put Option in ongc , or buy a bearish spread.

Out of the 2 bearish spreads, he decides to buy a Bearish Call spread.The reason for playing this strategy is that due to the recent rally in ONGC, the call prices have swelled, and the trader finds a net debit strategy more suitable to use, as the time expiry would work in his favour.

This strategy is the best for risk averse traders but requires a higher margin as the trader is shorting an option.

ONGC  is currently trading at 186. The trader decides to buy 1 lot CE of strike price 180 of near month expiry, paying a premium of Rs. 8.55 per share., and then sells 1 lot CE of strike price 175 receiving  a premium of 12.35 per share. The strategy is

Long CE of Strike Price 180 : Premium=8.55

Short CE of strike price 175 : Premium=12.35

The net premium received  is then

12.35-8.55)*LotSize=3.8*3750=Rs.14250.

This net premium received is the maximum profit which the trader can make using this strategy.

Let us consider the black line viz. 180 CE as Option A and the green line viz.

175 CE as Option B.

Orange Line is the total profit for the strategy.

Maximum profit occurs when both of the Call options become worthless at the time of expiry.

Below 175, both CE would have an Intrinsic value of 0. Therefore the trader will achieve a maximum profit of net premium received viz. 14250.

Now let us consider different scenarios for the strategy

Stock closes at Rs.173

Value of Option A=0

Value of Option B=0

Net profit in Option A= ( Value-Premium)*LotSize

=(0-8.55)*3750

= -Rs.32062

Net profit in Option B=(Premium-Value)*Lotsize

=(12.35-0)*3750

=Rs. 46312

Net Profit= 46312-32062=14250.

 

Stock closes at Rs.176

Value of Option A=0

Value of Option B=1

Net profit in Option A= ( Value-Premium)*LotSize

=(0-8.55)*3750

= -Rs.32062

Net profit in Option B=(Premium-Value)*Lotsize

=(12.35-1)*3750

=Rs. 42562

Net Profit= 46312-32062=14250

Stock closes at Rs.179

Value of Option A=0

Value of Option B=4

Net profit in Option A= ( Value-Premium)*LotSize

=(0-8.55)*3750

= -Rs.32062

Net profit in Option B=(Premium-Value)*Lotsize

=(12.35-4)*3750

=Rs. 31312

Net Profit= 31312-32062=-750

Stock closes at Rs.182

Value of Option A=2

Value of Option B=7

Net profit in Option A= ( Value-Premium)*LotSize

=(2-8.55)*3750

= -Rs.24562

Net profit in Option B=(Premium-Value)*Lotsize

=(12.35-7)*3750

=Rs. 20062

Net Profit= 20062-24562=-4500

  • Share:
author avatar
Trading Campus
We provide courses in Share Market Training certified by NSE Academy. Get Adequate knowledge through our classroom courses.

Previous post

Bear Put Spread
June 10, 2017

Next post

MoldTek Packaging
June 13, 2017

You may also like

Arithmetic Operators
12 May, 2021

There are around 7 arithmetic operators available in python. These are called as binary operators because they act on two operators. a = 13, b = 5 Operator Meaning Example …

Operators in Python
11 May, 2021

An operator is a symbol that performs an operation. Some examples of operations are addition, subtraction, multiplication etc. a + b is an operation where a,b are operands and ‘+’ …

Bear Call Spread
23 December, 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 …

    31 Comments

emerging leader

  • Basics of Python
  • Emerging Leaders
  • Financial Education
  • Fundamental Analysis
  • Investment Ideas
  • IPO Issues
  • Nifty 50
  • Options Corner
  • Risk Management
  • Technical Corner
  • Uncategorized

Past Batches

December 2018 – Completed

March 2019 – Completed

July 2019 – Completed

November 2019 – Completed

January  2020 – Running

Get Updates

Subscribe to our mailing list and get learning stuff and updates to your email inbox
Loading

Accordions

Company Summary

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.

Key Highlights of Company Business

Segments and Products

The Company's business segments consist of

  1. Lighting;
  2. Consumer Durables;
  3. Engineering & Projects,

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.

Financial Performance

Financial Ratios

Trading Campus

7718989954

info@tradingcampus.in

Company

  • About Us
  • Gallery
  • Team
  • Contact Us
  • Careers

Courses

  • Technical Analysis
  • Algo Trading
  • Options
  • Fundamental Analysis
  • Risk Management
  • Algo Trading using Python

Support

  • Learning Center
  • Forum
  • Login
  • Videos

Education WordPress Theme by ThimPress. Powered by WordPress.

Copyright © 2018 Trading Campus. All rights reserved.