Trade Bear Call Spread: Option Strategy Explained: Options, Futures, Derivatives & Commodity Trading

# Trade Bear Call Spread: Option Strategy Explained

Details about How to trade Bear Call Spread Option Strategy
Continuing further from our previous article Bear Call Spread: Example with Payoff Charts Explained, here is part II of the same.
In the past article we have seen how the basic payoff function is constructed upto the point of the BLUE graph which is without price taken into account.
But hang on - the BLUE graph is still incomplete representation of the payoff function for the Bear Call Spread. The reason? It does not account for the price or net money we paid/received for this option spread position. So, as a final touch, let's introduce the net price also in the BLUE graph.
Suppose that \$27 ITM call option gives you \$5 from its sale and \$33 OTM option requires you \$2 for buying it. Hence, to get into this position, you have to spend a net amount of \$5 - \$2 = \$3 (inflow - net received). Since this a net inflow (net received), it is positive for the buyer and hence the BLUE graph will shift upward by \$3 to become the RED graph, which explains the correct payoff function for the net Bear Call Spread from a buyer's perspective.

Few quick observations:
- This is formed by Calls
- This will be profitable to the buyer only when the underlying price goes down, as the positive part of the RED graph is below \$30 price
- Hence we have the Bear Call Spread Payoff function

What is the maximum Loss in a Bear Call Spread?
The maximum loss in the Bear Call Spread = Strike Price of Long Call - Strike Price of Short Call - Net Premium Received + Brokerage commission paid
So in the above example, the net loss will be \$33 - \$27 - \$3 + brokerage commission paid = \$3 + Brokerage

What is the maximum profit in a Bear Call Spread?
The maximum profit in Bear Call Spread is capped.
Maximum Profit in Bull Put Spread = Net Premium Received - Brokerages Paid
so in the above example, it will be \$3 - Brokerages Paid

When to trade a Bear Call Spread?
As a genral rule, Options Spreads should be traded when you dont want to risk enough money and you are satifsfied with the limited profits. So Limited Risk, Limited Profit kind of mindset makes it ideal for option spread trading.
Then, specifically for the Bear Call Spread, for the buyer it will be profitable only when the underlying stock price or index value goes down i.e. the buyer should have a bearish view
Also, as quoted in the example above, the buyer will be net receiver of the premium once he gets into this combination
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