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In finance, a bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying with the same expiration month.
[edit] Example
Consider an arbitrary stock quoting at $100 (lot size = 100) in this month. The call option for this month for strike price of $105 is at $2 and the call option for this month for $95 is trading at $7.
The trade can buy the $105 call option (outflow of $200) and sell the $95 call option (inflow of $700). The total inflow will be $500. The trader will be profitable when the stock ends below 100.
The max loss is 105-95-5=5 per share(if the share price ends at or above 105), max profit is 5 per share. when the share price ends at or below 95.
[edit] References
- McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., New York : New York Institute of Finance. ISBN 0-7352-0197-8.
[edit] External links
