Bear Call SpreadA bear call spread is a type of vertical spread.
It contains two calls with the same expiration but different
strikes. The strike price of the short call is below the strike of
thelong call, which means this strategy will always generate a net
cash inflow (net credit) at the outset. An investor who enters into
a bear spread is hoping that the stock price will decline.Strike
price of long call option K2 = 50, Premium C = 2Strike price of
Short call option K1 = 40, Premium C= 5So, Net Premium = (5-2) =
3
Profit/Loss
Short Call, Strike K1 5
3
50 4340ST
Long Call, Strike K2 -2
-7
Breakeven point of long call = Long call strike price + Premium
paid = 50 + 2 = 52Breakeven point of short call = Short call strike
price + Premium received = 40 + 5 = 45Breakeven Point of bear call
spread = Strike price of short call + Net premium received = 40 + 3
= 43Maximum Loss = Strike price of long call - Strike price of
short call - Net premium received + Commissions paid = 50 40 3 =
7Maximum Profit = Net premium paid + Commission paid = 3Payoff
Table of Bear Call Spread
Stock PricePayoff from long call optionPayoff from short call
optionTotally PayoffNet payoff (After adjustment)
300000+(3) = 3
400000+(3) = 3
430K1-ST =40-43 = -3-3-3 + 3 = 0
50ST-K2 = 50-50 = 0K1-ST = 40-50 = -10-10-10 + 3 = -7
53ST-K2 =53-50 = 3K1-ST =40-53 = -13-10-10 + 3 = -7
Explanation: If the stock price is 30, neither short nor long
call option will be exercised. We have an initial inflow of 3. So
the total payoff will be 3. If the stock price is 43, long call
option will be worthless and payoff from short call will be -3.
After making adjustment, our total payoff will be -3+3 = 0. As the
total payoff is 0 at stock price 43, this will be the breakeven
point of bear call option. If the stock price is 53 at the
expiration date, both the long and short call option will be
exercised. The payoff of short call and long call will be -13 and 3
respectively. Total payoff after making adjustment will be -7.In
short, Maximum profit from a bear call spread will be gained when
the stock price is equal or less than lower strike price and
maximum loss will be occurred when stock price is equal or greater
than the higher strike price. Here, the maximum profit will be 3
when the stock price is equal or less than 40. Maximum loss will be
7, when the stock price is equal or greater than 50.
