A trader shorts or writes a Call Option when he feels that underlying stock price is likely to go down. Selling Call Option is a strategy preferred for experienced traders.
However this strategy is very risky in nature. If the stock rallies on the upside, your risk becomes potentially unquantifiable and unlimited. If the strategy
When a trader is moderately bearish on the market he can implement this strategy. Bear-Put-Spread involves buying of ITM Put Option and selling of an OTM Put Option. If prices fall, the ITM Put option starts making profits and the OTM Put option also adds to profit at a certain extent if the expiry price stays above the OTM strike. However, if it falls below the OTM ..
SHORT CALL Vs BEAR PUT SPREAD - When & How to use ?
SHORT CALL
BEAR PUT SPREAD
Market View
Bearish
Bearish
When to use?
It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.
The bear call spread options 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.
Action
Sell or Write Call Option
Buy ITM Put Option, Sell OTM Put Option
Breakeven Point
Strike Price of Short Call + Premium Received
Strike Price of Long Put - Net Premium
SHORT CALL Vs BEAR PUT SPREAD - Risk & Reward
SHORT CALL
BEAR PUT SPREAD
Maximum Profit Scenario
Max Profit = Premium Received
Max Profit = Strike Price of Long Put - Strike Price of Short Put - Net Premium Paid.
Maximum Loss Scenario
Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
Max Loss = Net Premium Paid.
Risk
Unlimited
Limited
Reward
Limited
Limited
SHORT CALL Vs BEAR PUT SPREAD - Strategy Pros & Cons
SHORT CALL
BEAR PUT SPREAD
Similar Strategies
Covered Put, Covered Calls
Bear Call Spread, Bull Call Spread
Disadvantage
• Unlimited risk to the upside underlying stocks. • Potential loss more than the premium collected.
• Limited profit. • Early assignment risk.
Advantages
• With the help of this strategy, traders can book profit from falling prices in the underlying asset. • Less investment, more profit. • Traders can book profit when underlying stock price fall, move sideways or rise by a small amount.
• If the strike price, expiration date or underlying stocks are rightly chosen then risk of losses would be limited to the net premium paid. • This strategy works well in declining markets. • Limited risk.
