Question

Give a brief example of the option ( Bear Call Spread ) ?

Answer 1

A bear call spread consists of one short call with a lower strike price and one long call with a higher strike price. Both calls have the same underlying stock and the same expiration date.

Let's assume that a stock is trading at $30. An options trader can use a bear call spread by purchasing one call option contract with a strike price of $35 and a cost/premium of $50 ($0.50 * 100 shares/contract) and selling one call option contract with a strike price of $30 for $2.50 or $250 ($2.50 * 100 shares/contract). In this case, the investor will earn a credit of $200 to set up this strategy ($250 - $50). If the price of the underlying asset closes below $30 upon expiration, then the investor will realize a total profit of $200 (($250 - $50) - ($35 - $30 * 100 shares/contract)).

The profit from the bear call spread maxes out if the underlying security closes at $30 —the lower strike price —at expiration. If it closes below $30 there will not be any additional profit. If it closes between the two strike prices there will be a reduced profit while closing above the higher strike, $35, will result in a loss of the difference between the two strike prices reduced by the amount of the credit received at the onset.