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Bear Call Spread: Profit/Los S Short Call, Strike K1

A bear call spread involves buying one call option at a higher strike price and selling another call option at a lower strike price on the same underlying stock. This generates an initial net credit. The strategy profits if the stock price declines below the breakeven point. The breakeven point is the short call strike price plus the net credit received. The maximum profit is equal to the net credit. The maximum loss occurs if the stock rises above the long call strike price and is equal to the difference between the long and short call strike prices minus the net credit.

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110 views2 pages

Bear Call Spread: Profit/Los S Short Call, Strike K1

A bear call spread involves buying one call option at a higher strike price and selling another call option at a lower strike price on the same underlying stock. This generates an initial net credit. The strategy profits if the stock price declines below the breakeven point. The breakeven point is the short call strike price plus the net credit received. The maximum profit is equal to the net credit. The maximum loss occurs if the stock rises above the long call strike price and is equal to the difference between the long and short call strike prices minus the net credit.

Uploaded by

Jamal Hossain Shuvo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Bear Call Spread

A 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 the long 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 = 2
Strike price of Short call option K1 = 40, Premium C= 5
So, Net Premium = (5-2) = 3

Profit/Los
s
Short Call, Strike
K1

5
3

-2

ST

40
Long Call, Strike
K2

43

50

-7

Breakeven point of long call = Long call strike price + Premium paid = 50 + 2 = 52
Breakeven point of short call = Short call strike price + Premium received = 40 + 5 = 45
Breakeven Point of bear call spread = Strike price of short call + Net premium received
= 40 + 3 = 43

Maximum Loss = Strike price of long call - Strike price of short call - Net premium received +
Commissions paid = 50 40 3 = 7
Maximum Profit = Net premium paid + Commission paid = 3

Payoff Table of Bear Call Spread


Stock Price

Payoff from long call

Payoff from short

Totally

Net payoff (After

option

call option

Payoff

adjustment)

30

0+(3) = 3

40

0+(3) = 3

43

K1-ST =40-43 = -3

-3

-3 + 3 = 0

50

ST-K2 = 50-50 = 0

K1-ST = 40-50 = -10

-10

-10 + 3 = -7

53

ST-K2 =53-50 = 3

K1-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.

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