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Key Learnings:Basics of Stock MarketFinancial Market
Whether we analyze a stock though fundamentals or technical, it’s extremely important for us to know how to trade that analysis.
What trade action to be taken which will minimize our risk and maximize our profit and hence achieving a good risk reward ratio.
A strategy is a pre convinced logical plan involving position selection and a follow up action.
The spread strategies are some of the easiest option strategies that a trader can implement.
When you are moderately bearish on a stock / underlying asset , one could go in for a bear spread.
A bear spread can be initiated by both calls and puts
In this video lets discuss as how can we initiate a bear spread using calls.
As we know spread strategy involves buying and selling options of same category but different strike prices.
Bear call spread involves:
Selling a call at a lower strike price i.e. an In the Money option or At the Money option
Buying a call at a higher strike price i.e. Out of the Money Options
A bear call spread is established for a net credit (or net amount of premium received) and profits from a declining stock price or passage of time.
Lets understand this better with the help of an example.
Sell a Call of Strike Price 10350 , receiving a premium of 111 and buying a call of strike 10450 by paying a premium of 64. Nifty spot price is currently trading at 10360.
Here maximum loss = spread – maximum profit which is equal to 53, maximum profit = net premium inflow = 47 and breakeven point = higher strike – maximum loss which is equal to 10397.
As can be seen from the example above the loss and profit is both limited. Maximum loss from this strategy is 53 and maximum profit is 47. The trader would start incurring losses if the price of the underlying asset increases i.e. inverse to what he has been speculating.
To conclude, we can say that the bear call spread is a great alternative to simply buy a put outright keeping in mind when the trader is neutral to bearish on the price action in the underlying stock.
Thank you watching the video.
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