The bear call spread technique is employed when we thinks that the price of underlying asset will go down moderately in near term. If you think the cost will go down a lot, I suggest don’t use this technique. There are far better technique for that condition. It is implemented by selling an in-the-cash (ITM) call alternative (has higher price) and purchasing an out-of-the-funds (OTM) call choice (has lower price) on the exact same underlying stock with the exact same expiration date. bear call spread has limited profit and risk. This kind of strategy is recognized as credit spread where you will get income when entering the position. The quantity received by selling higher strike call option is higher than the cost of purchasing call with lower strike.
To realize far better, here’s an example. Stock XYZ is trading at , and we think it is going to drop soon moderately, so we enter a bear call spread by purchasing a September 45 call for and writes a September 35 call for . Thus, we receives a net credit of when entering this position. If XYZ begins to drop and closes at on expiration date, both choices expire worthless and we maintain the whole credit of as profit. This is the maximum profit you can get. If XYZ goes up to , both choices expire in-the-dollars. The September 35 call will have an intrinsic value of and the September 45 call will have an intrinsic value of . This means that the position is now worth at expiration or loss. Since we had received a credit of when entered the spread, our net loss comes to . This is the maximum loss you can have. The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
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