Asio Investment Tools  
Home Fundamentals Bearish Strategies Bear Call Spread
 

Generate Income,Trade Options Like a ProGo To Options Analysis Software

  
 

Bear Call Spread

 
 

Bear call spread strategy description:

  
 

Selling short in-the-money call, and buying higher strike call out of the money strike. 
The strategy's outlook for this financial instrument is bearish in the short or even, a median term. According to its typical characteristics, this strategy is a credit spread, and it will usually be neutral or positive concerning time value.
Eventually, if the short contract's strike price is above the financial instrument’s price at expiration, both contracts will be worthless, or else the short strike will be below the instruments price. Probably the contract's counterparty will assign this short position and will place the account with short financial instrument.

  
  Bear Call spread profit and loss graph, current time and at expiration  
 

Prospect direction: The stock will be short-to-median-termed bearish, considering the duration and implied volatility.
Profit potential: Selling the ATM strike and buying OTM strike will enforce a profit cap usually equals to the credit or premium received.
Loss potential: On the other hand, selling this lower strike and buying the higher strike will minimize your risk. We will explore most of pros and cons concerning this strategy.
Risk reward: The floor, made by the long call option that will encounter maximum loss, divided by the cap made by the short call lower strike that will encounter maximum profit.

  
 

 
  Breakeven point at expiration: Premiums received + lower strike will be equal to the financial instrument's market price.
Time factor: With all other variables unchanged, an option typically loses time a value premium with every passing day, and the rate of time value losses tends to accelerate as it reaches to the end of its term, the expiration date.   As with most short-option strategies, the passage of time has a positive impact on the short seller. As time remaining to expiration decreases the statistical chances for a loss in the intrinsic value shrinks, too. The second leg is the long call, which will lose with time decay. Exploring that issue will let us position this strategy to distinguish the time factor, whether theta is positive or negative.
Implied volatility: Generally, an increase in implied volatility would negatively affect this strategy, if all other variables remain equal. Volatility tends to boost the value of an option, because it indicates a greater statistical probability that the stock will move enough to give the option intrinsic value by the expiration day. On the other hand, a decline in volatility has a tendency to lower an option's value, regardless of the overall stock price trend, although this strategy will influence negatively by the implied volatility.
Dividends: Dividends positively affects the call option contract short seller (the contract's writer). On an ex-dividend date, the amount of the dividend will deduct from the value of the underlying stock. The second positions leg is the long call, which will lose from the dividend deduction.