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Bear Call Spread Vs Bull Put Spread; Option Trading Strategies | Beginner’s Guide to The Stock Market | Module 25

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Bear Call Spread Vs Bull Put Spread; Option Trading Strategies | Beginner’s Guide to The Stock Market | Module 25

In today’s lesson, we are going to compare the Bear Call Spread vs Bull Put Spread. In the previous blog of the Beginner’s Guide to the Stock Market series, we have seen Long Straddle and Short Straddle Option Strategies.

Before going ahead, it is important to know that these strategies are more suitable for people who want to do option selling but have a limited margin in their accounts. So, if in case you want to benefit from time decay or you want to eat the entire premium by shorting options of the money options, then these strategies are for you.

Bear Call Spread

A Bear Call Spread has the same intent as shorting a call, but here is a catch. In naked option selling, you just sell a call, but in the case of the bear call spread along with shorting a call, you also buy a call.

The long call reduces the unlimited risk but also limits your reward.

Here is how you can initiate this strategy-

Consider the price of nifty is at 17200.

Step 1 – Short In The Money Call Option or At the money call option. In our case, let’s say we sell 17000CE, which is trading at Rs.242.

Step 2 – In order to hedge position 1, Buy-Out of The Money call. In our case, Let’s say we buy 17400CE, which is trading at Rs.26.

By doing this, you are taking bearish to neutral trade with a hedge. Now considering various probabilities,

1) suppose nifty shoots up; then, in that case, you will face max loss of Strike A – Strike B – Credit Received.

2) Suppose nifty stays sideways. In that case, also you will come out profitable, or you will close your trade on breakeven.

3) Suppose nifty falls below 17000, then you will make a max profit which will be equal to the credit received in our case, which is Rs.216.

 

The payoff of this strategy is as follows-

The time decay in this strategy will positively affect your position as you want to eat more and more premium. In this strategy effect of Implied Volatility depends on where the underlying is at. If the underlying is near the long call, then, in that case, you want implied volatility to decrease.

Bull Put Spread

Bull Put Spread is the exact opposite of Bear Call Spread. A Bull Put spread is the same as shorting the put but with a slight change. In naked option selling, we just short the put, but here, we sell in the money put or at the money put.

The long put reduces the unlimited risk but also limits your reward.

Here is how you can initiate this strategy-

Consider the price of nifty is at 17200.

Step 1 – Short In The Money Put Option or At the money put option. In our case, let’s say we sell 17400PE, which is trading at Rs.236.

Step 2 – In order to hedge position 1, Buy-Out of The Money Put. In our case, Let’s say we buy 17000PE, which is trading at Rs.32.

By doing this, you are taking bullish to neutral trade with a hedge. Now considering various probabilities,

1) Suppose nifty shoots up then, in that case, you will make max profit which will be credit received in our case that is Rs.204

2) Suppose nifty stays sideways. In that case, you will also come out profitable or close your trade on breakeven or slight loss due to current option pricing.

3) Suppose nifty falls below 17000, then you will make a max loss which will be equal to Strike A – Strike B – Credit Received.

The time decay in this strategy will have a positive effect on your position as you want to eat more and more premium. In this strategy effect of Implied Volatility depends on where the underlying is at. If the underlying is near the long put, then, in that case, you want implied volatility to decrease.

So this was a brief overview of these strategies. Bear Call Spread and Bull Put Spread are the simplest directional option selling strategies. With a margin of 60k to 70k, you can initiate these strategies. I hope that through this article, you were able to understand the steps involved in initiating these strategies and when to use them.

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