What is Bear Call Spread Hedging Strategies ?

bear call spread hedging strategies

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

Call sold.

Investor view: Moderately bearish on the Stock/ Index.

Risk: Limited.

Reward: Limited to the net premium received.

Breakeven: Strike price of Short Call + premium received.

Illustration

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.

Buy(1)Sell(0)

Expiry

Gross P/L

LOT SIZE

TOTAL P /L

114900200call015500–5075–375021510050call115450–5075–3750315400–5075–3750415350–5075–3750515300–5075–3750615250–5075–3750715200–5075–3750815150–5075–3750915100–5075–3750pls whatsapp9699646408150500750Difference501500050753750Expiry from1550014950100757500lot size75149001507511250148501507511250

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148001507511250147501507511250

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147001507511250146501507511250146001507511250145501507511250145001507511250144501507511250144001507511250143501507511250143001507511250142501507511250142001507511250141501507511250141001507511250140501507511250140001507511250139501507511250139001507511250138501507511250138001507511250137501507511250137001507511250136501507511250136001507511250135501507511250135001507511250134501507511250134001507511250133501507511250133001507511250132501507511250132001507511250131501507511250131001507511250130501507511250

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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