The Bear Call Spread strategy can be adopted when the investor feels that the stock/index is either range bound or falling. The concept is to protect the downside of a Call Sold by buying a Call of a higher strike price to insure the Call sold. In this strategy the investor receives a net credit because the Call he buys is of a higher strike price than the Call sold. The strategy requires the investor to buy out-of-the-money (OTM) call options while simultaneously selling in-the-money (ITM) call options on the same underlying stock index. This strategy can also be done with both OTM calls with the Call purchased being higher OTM strike than the Call sold. If the stock/index falls both Calls will expire worthless and the investor can retain the net credit. If the stock/index rises then the breakeven is the lower strike plus the net credit. Provided the stock remains below that level, the investor makes a profit. Otherwise he could make a loss. The maximum loss is the difference in strikes less than the net credit received.
When to Use: When the investor is mildly bearish on market.
Risk: Limited to the difference between the two strikes minus the net premium.
Reward: Limited to the net premium received for the position i.e., premium received for the short call minus the premium paid for the long call.
Breakeven Point: Lower Strike + Net credit
Mr. XYZ is bearish on Nifty. He sells an ITM call option with strike price of Rs. 2600 at a premium of Rs. 154 and buys an OTM call option with strike price Rs. 2800 at a premium of Rs. 49.
Strategy: Sell a call with a lower strike price (ITM) + Buy a Call with a higher strike (OTM).