What Does “Bear Call Spread” Mean?
The Bear Call Spread is the spread used when the traders expect a fall in rates of underlying asset. The strategy involves selling of call option at a particular strike price and purchase of equal number of call option at a strike price higher than that. The difference in the amount received on short option and long option payment becomes the maximum gain for this.
How Does “Bear Call Spread” Applied in Options Market?
An example to understand this better: Assume that a security is currently trading at $50. There is a purchase by an investor for a call options at $55 at a premium of $0.50 and also there is a sale of a call option with strike price $50 for a premium of $1.50. Hence, if the rate of underlying closes lower than $50 on expiry, the investor earns $200 (($1.50-$0.50) *100 shares/contract).
Tags: Bear Call Spread, call option, strike price
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