In this strategy, one expects markets to go down. The strategy balances profit and risk.

Bear Spread - Call Strategy (definition)
A bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration month.

Date: 28th July 2011
Nifty Value: 5485
  • Sell (write) one lot of 5500 Call (25 AUG 2011 expiry) at a premium of 103
  • Buy one lot of 5700 Call (25 AUG 2011 expiry) at a premium of 32.

71 Rs (103 - 32) per lot (3550 Rs) is credited to your account entering the above position. You will make profits if Nifty ends below 5571 (5500 + 71) at expiry (25 AUG 2011).

Below are the various profit/loss scenarios at expiry
  • Nifty ends below 5500 - Fixed profits of Rs 3550
  • Nifty ends between (5500 - 5571) - You will make profits ranging from (Rs 3550 - Rs 0)
  • Nifty ends between (5571 - 5700) - You will make losses ranging from (Rs 0 - Rs 6450)
  • Nifty ends above 5700 - You will make fixed losses of Rs 6450.

If you are a smart trader, you will get opportunities before expiry to exit the bear spread strategy with decent profits even if Nifty does not stay below 5571.

(write:buy) ratio in the above example is 1:1 and the gap between write and buy contracts is 200 Points in Nifty. You can tweak the (write:buy) ratio and gap to build you own strategy based on your risk appetite.

Note: I did not include brokerage charges in the above example

Any views on this strategy are welcome. Let us know how it works for you.