Investment Type: Credit
Strike Prices: ITM/ATM/OTM for bought leg, OTM for sold leg
Expiration Month: Same expiration month between sold leg and bought leg, preferably current month.
Composition: Sell lower strike call + Buy higher strike call
| Bear Call Spread Profile Chart | ||
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Bear Call Spread is another form of Credit Spread but with bearish expectation. The main thing to look at for this strategy is that we make sure that we receive a net credit. We Sell lower strike Call and Buy higher strike Call in the process.
If we choose OTM Call for the sold leg, then we will have more cushion but our reward will be severely capped and in most cases lower than our risks. If we choose ITM Call for the sold leg, we substitute cushion with a better risk/reward ratio, and we need to have stronger bearish outlook.
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Entry:
Investment @ Entry = (Premium of Sold leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) = ($7,525) + $2,800 = Credit ($4,725)
Exit:
Best Case Scenario:
Profit @ Exit = (Premium of Sold leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) - Investment @ Entry = $ 0 + $ 0 – ($4,725) = $4,725
Return of Investment = Profit @ Exit / Investment @ Entry = 100%
Worst Case Scenario : (Difference between Strike Prices – Net Credit) x No of Contracts
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