Bear Call Spread options strategy should be used if the outlook for market (Index or Stock) is Bearish. Even if there is slight positive movement then also it can be considered. So if you are bearish on market and think that there will not be decent positive movement then you can use this technique.
It is limited loss and limited profit technique. So it preserves you from getting broke in single trade. The technique is combination of two option trades. It is combination of below techniques (you can click on the links below to read them in details in case you have not previously.
- Buy CALL Option – You should buy ITM call option
- Sell CALL Option – You should sell OTM call option
- Both of them should be of same Expiry
- Both the trades should be on same instrument
Below videos explain the strategy in details with example of Nifty. It also explains maximum profit you can make from it and maximum loss you would incur if the market turns bullish contrary to your understanding. I would suggest watching and understanding the concept in details using the video in language of your choice before practicing it.The video explains below concepts with details
- When to use the strategy?
- What are the profit and loss scenarios?
- Explanation of the technique with Nifty example
- Comparison with other similar techniques
- Margin requirement for the strategy
If you are new to Options trading then I would suggest you to watch or read the Getting Started tutorial on Options . That will help you understand the strategies as well.
English Video
Hindi Video
Conclusion
The strategy requires you to have an opinion on market direction sometimes it is tough to predict market direction. So in case you have view on the stock direction then better to use it for stocks. It is important for underlying instrument to be in bearish mode. It can have Doji like closing then also chances are that you will make profit but if it moves well above the strike price you sold then loss will maximize.
It is opposite of Bull Call Spread options strategy which we discussed before this article. That technique should be used if your view about market is bullish and this one needs to be used if your view about market is bearish. So based on the outlook of yours you can pick the technique. This is the beauty of knowing all the techniques as you have option to use the one which suits the scenario.
This is combination of Selling and buying options so the margin requirement is more compared to the buying only strategy. There are other bearish only strategies mentioned in this Options trading guide series which you can use based on the margin requirement and your preference. Note this is direction based strategy so you need to be careful while using it as your outlook about market needs to be correct if not then there is chance of making a loss trade. The number of times your outlook is wrong your loss will accumulate. In that case you can use market neutral techniques as those does not need you to predict the market outlook.