Options Trading Strategies: Bear Call Spread
A bear call spread (short call spread) is a two legged strategy that consists of one short (sold) In The Money call and a long (bought) Out of The Money call, with the same expiration date.
When to use this strategy?
You are moderately bearish to neutral, and expect that the BTC/ETH price will fall in the near future. Also, a bear call spread is an alternative to the short call as it has a capped loss.
Below is a Profit and Loss chart example of a bear call spread options strategy:
Pros:
Limited maximum loss in comparison to naked call. This is a short term income strategy so you may profit without any movement of the BTC/ETH price.
Cons:
In most cases your maximum loss is will be greater than the maximum profit, in spite of the limited drawback.Limited maximum profit if the BTC/ETH price drops below the lower strike.
Example:
In this example, BTC is trading at 37,910.60 USD, and you expect its price to moderately fall. You have sold anITM call with a strike price of 37,000.00 USD, and bought an OTM call with with a strike price of 39,000.00 USD, both with an expiration date of February 11th 2022. As this is a credit spread, and a long call costs you less than a premium from a short call you have received a net premium of 1,007.88 USD which is also your maximum profit.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price falls below the lower strike, both calls will expire worthless, and you keep the net credit, which is your maximum profit.
If the BTC price end up between the strikes, but remains below the beak even point, you will still make profit.
If the BTC price rises above the higher strike the short call will be assigned and the long call is exercised. This means that BTC is sold at the lower strike price and purchased at the higher strike price and the result is your maximum loss which is the difference in strikes minus the net premium received.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 37,000.00 (strike price SC) | +1,007.88 (max gain) |
| 37,171.00 | +836.88 |
| 37,469.00 | +538.88 |
| 37,816.00 | +191.88 |
| 38,007.88 (break even) | 0 |
| 38,190.00 | -182.12 |
| 38,502.00 | -494.12 |
| 38,853.00 | -827.12 |
| 39,000.00 (strike price LC) | -992.12 (max loss) |