Bear Call Spread option trading strategy is used by a trader who is bearish in nature and expects the underlying asset to dip in the near future. This strategy includes buying of an ‘Out of the Money’ Call Option and selling one ‘In the Money’ Call Option of the same underlying asset and the same expiration date. When you write a call, you receive premium thereby r
Mr. X owns Reliance Shares and expects the price to rise in the near future. Mr. X is entitled to receive dividends for the shares he hold in cash market. Covered Call Strategy involves selling of OTM Call Option of the same underlying asset. The OTM Call Option Strike Price will generally be the price, where Mr. X will look to get out o ..
BEAR CALL SPREAD Vs COVERED CALL - When & How to use ?
BEAR CALL SPREAD
COVERED CALL
Market View
Bearish
Bullish
When to use?
This strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.
An investor has a short term neutral view on the asset and for this reason holds the asset long and has a short position to generate income.
Action
Buy OTM Call Option, Sell ITM Call Option
(Buy Underlying) (Sell OTM Call Option)
Breakeven Point
Strike Price of Short Call + Net Premium Received
Purchase Price of Underlying- Premium Received
BEAR CALL SPREAD Vs COVERED CALL - Risk & Reward
BEAR CALL SPREAD
COVERED CALL
Maximum Profit Scenario
Max Profit = Net Premium Received - Commissions Paid
[Call Strike Price - Stock Price Paid] + Premium Received
Maximum Loss Scenario
Maximum Loss = Long Call Strike Price - Short Call Strike Price - Net Premium Received
Purchase Price of Underlying - Price of Underlying) + Premium Received
• Limited amount of profit. • Margin requirement, more commission charges.
• Unlimited risk, limited reward. • Inability to earn interest on the proceed used to buy the underlying stock.
Advantages
• This strategy takes advantage of time decay. • Investors can get profit in a flat market scenario. • Investors can earn options premium income with a lower degree of risk.
• Profit from option premium, rise in the underlying stock and dividends on the stock. • Allows you to generate income from your holding. • Profit when underlying stock price rise, move sideways or marginal fall.
