if(is_category()) { $categories = get_the_category(); $category_id = $categories[0]->term_id; echo ''; }

Option Backtesting | Free Nifty & Bank Nifty Strategy Software Tester India

Bear Call Spread Option Strategy | Risk Rewards Expained

What is Bear Call Spread Option Strategy ?

what-is-bear-call-spread-option-strategy

Bear Call Spread Option Strategy is executed when you expect the price to go down, hence it is a Bearish Strategy. Bear Call Spread is a two-leg option strategy is most popular in options trading from Amateurs to Stock Market Professionals. which requires both Buying and Selling of a call option of different strike price of the same expiry of the same index or Stock, in Bear Put Spread You sell a lower strike Call and You buy a higher strike Call.

The Risk and Rewards of Bear Put spread Option Strategy are limited Profits and limited loss. In this article, we will explain in details on risk and reward profiles. Money Management, how and when to when to implement the strategy, how to keep stop loss, trail and book full profits, Money Management Techniques and Right Position Sizing and everything else.

How to execute a trade of Bear Call Spread Option Trading Strategy ?

1. Sell a Call Lower Strike Call Option:

  • The strategy begins with Selling an OTM out of-the-money or ATM- at-the-money put option , often referred to as the “Short Call.”
  • This establishes the trader’s bearish sentiment on the underlying asset.

Also read Bear Put Spread

2. Buy a Higher Strike Call Option:

  • Selling a naked Call option is a risky business as there are chances that you might face unlimited loss if the trade goes wrong. So to cap the high risk and potential losses from the Short Call, a higher strike Call option, known as the “Long Call,” is bought.
  • The long call works as an insurance and minimizes the risk on capital. But it also limits the profits
  • Buying a Call option turns a strategy from Limited Profit and Unlimited Loss to Limited Profit to Limited Loss.

Risk and Reward of Bear Call Spread Strategy:

1. Reward is Defined

  • The maximum profit you can get in bear is limited to call is spread net premium received.
  • You can get profit if the price remains above the strike price of the Short Call at time time of expiration

  •  

2. Risk is also Defined:

  • Risk happens if the stock or index price rises below the strike price of the short call at the time of expiration.
  • The maximum loss you can have in a bear put spread strategy is defined at the difference between Short and Long Call strike – (minus) net premium paid.

When to execute Bear Call Spread Trading Strategy :

  1. Expecting Price to go down:

  • Execute a bear Call spread when you anticipate a bearish movement in stock or index.

    • Execute Bear Call Spread Trading Strategy Options PCR is negative, Short build up in futures. Price facing rejection at resistance, Breaking of support levels. But before executing this strategy do thorough technical and data analysis to support your bearish view.

Position Sizing for Bear Call Spread Option Strategy:

  1. Risk acceptance:

  • Always calculate your risk (maximum loss you can face) before initiating a bear Call spread.

    • Allocate capital to each strategy in such a manner that you can handle potential losses in the worst-case scenario.

  • Positon sizing:

  • How much will you lose on Bear Call Spread but Calculate how much percentage of capital you will lose if trade goes wrong.

    • Executing multiple strike price bear put spread so that your risk spread. It will help you to protect Capital.

How to keep Stop Loss in Bear Put Spread :

  1. Set Stop loss in your trading terminal:

  • Always place a stop loss order in your broker terminal because if the price moves swiftly in opposite direction you will not be facing major losses.

    • Always keep stop loss above major resistance.

  • Why to keep stop loss in system:

  • Keeping a stop loss in system as soon as you place a order. This will keep you away from being greedy or fearful; it will help you to be emotionally free. However, you can modify stop loss order later, But keep it in system not in you mind.

    • Keeping a stop loss tight will help you to protect your capital so that you can survive for long time.

Money Management Rule for Bear Put Spread

  1. Position Sizing affecting your Portfolio:

  • Don’t take huge position in bear put spread, though the risk is limited, a huge loss can put a dent in your capital.

    • Make different strategies if your view is bearish. Don’t just rely on Bear Put Spread

  • Maximum Loss Limits:

  • Set maximum loss per bull put spread based on your Capital.

    • Make sure that a loss in single trade you never lose huge portion of your capital.

How to trail and book profits in bear put spread option strategy

  1. How to Trail Profits:

  • When the Long Put you have purchased is 2 to 3 strikes in the money, then trail profits by shifting the positon down, it will protect your profits.

    • Or you can simply adjust the long put by selling one OTM Put

  • How to Book Full Profits:

  • Book full profits when the stock or index price reaches major support

    • Don’t be greedy and let the profits vanish when you see the change in trend : book profits It’s that simple

Key Takeaways:

This is the one of the favorite strategy of professional traders.The bear put spread strategy offers a great risk management by a combination of short and long put options. It helps you to catch a downtrend or price going down without have to worry about huge losses

If you the mechanics, risk and reward profiles, and apply good position sizing with money management techniques with strict stop-loss you can easily make profits whenever you are right.

If you trade with discipline and not take random trades, and take trade only near resistance, in downtrend, when support is broken or when the derivative data is negative the bear put spread can be extremely profitable while managing risk in a volatile market environment.

About the Author

You may also like these