Bear Call Spread | How We Trade Bear Call Spread ?
Bear Call Spread is a strategy that must be devised when the investor is moderately bearish on the market direction and is expecting the underlying to fall in the short-term.
A Bear Call Spread is formed by buying an “Out-of-the-Money Call Option” (higher strike) and selling an “In-the-Money Call Option” (lower strike). Both Call options must have the same underlying security and expiration month.
The investor receives a net credit because the Call bought is of a higher strike price than the Call sold.
The concept is to protect the downside of a Call sold by buying a Call of a higher strike price to insure the
E.g.. Nifty is currently trading @ 15000. Investor is expecting the markets to fall down drastically from these levels. So, by selling a Call option of Nifty having Strike 14900 @ premium 200 and buying a Call option of Nifty having Strike 15100 @ premium 50, the investor can get an inflow of the premium of RS 150 and benefit if Nifty stays below 15000.
In the above chart, the breakeven happens the moment Nifty crosses 15050 and risk is limited to a maximum of 3750 (calculated as Lot size * Premium received).
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