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Bear Call Option Trading Strategy

Bear Call Option Trading Strategy
by Nilesh Jain 05/08/2017

What is a Bear Call Spread Option strategy?

A Bear Call Spread is a bearish option strategy. It is also called as a Credit Call Spread because it creates net upfront credit at the time of initiation. It involves two call options with different strike prices but same expiration date. A bear call spread is initiated with anticipation of decline in the underlying assets, similar to bear put spread.

When to initiate a Bear Call Spread Option strategy?

A Bear Call Spread Option strategy is used when the option trader expects that the underlying assets will fall moderately or hold steady in the near term. It consists of two call options – short and buy call. Short call’s main purpose is to generate income, whereas higher buy call is bought to limit the upside risk.

How to construct the Bear Call Spread?

Bear Call Spread can be implemented by selling ATM call option and simultaneously buying OTM call option of the same underlying assets with same expiry. Strike price can be customized as per the convenience of the trader.

Probability of making money

A Bear Call Spread has a higher probability of making money. The probability of making money is 67% because Bear Call Spread will be profitable even if the underlying assets holds steady or falls. While, Bear Put Spread has probability of only 33% because it will be profitable only when the underlying assets fall.

Strategy

Sell 1 ATM call and Buy 1 OTM call

Market Outlook

Neutral to Bearish

Motive

Earn income with limited risk

Breakeven at expiry

Strike Price of short Call + Net Premium received

Risk

Difference between two strikes - premium received

Reward

Limited to premium received

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9300

Sell 1 ATM call of strike price (Rs)

9300

Premium received (Rs)

105

Buy 1 OTM call of strike price (Rs)

9400

Premium paid (Rs)

55

Break Even point (BEP)

9350

Lot Size

75

Net Premium Received (Rs)

50

Suppose Nifty is trading at Rs 9300. If Mr. A believes that price will fall below 9300 or holds steady on or before the expiry, so he enters Bear Call Spread by selling 9300 call strike price at Rs 105 and simultaneously buying 9400 call strike price at Rs 55. The net premium received to initiate this trade is Rs 50. Maximum profit from the above example would be Rs 3750 (50*75). It would only occur when the underlying assets expires at or below 9300. In this case both long and short call options expire worthless and you can keep the net upfront credit received. Maximum loss would also be limited if it breaches breakeven point on upside. However, loss would also be limited up to Rs 3750(50*75).

For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff Schedule:

On Expiry Nifty closes at

Net Payoff from Call Sold 9300 (Rs)

Net Payoff from Call Bought 9400 (Rs)

Net Payoff (Rs)

8900

105

-55

50

9000

105

-55

50

9100

105

-55

50

9200

105

-55

50

9300

105

-55

50

9350

55

-55

0

9400

5

-55

-50

9500

-95

45

-50

9600

-195

145

-50

9700

-295

245

-50

9800

-395

345

-50

Bear Call Spread’s Payoff Chart:

Impact of Options Greeks:

Delta: The net Delta of Bear Call Spread would be negative, which indicates any upside movement would result in to loss. The ATM strike sold has higher Delta as compared to OTM strike bought.

Vega: Bear Call Spread has a negative Vega. Therefore, one should initiate this strategy when the volatility is high and is expected to fall.

Theta: The net Theta of Bear Call Spread will be positive. Time decay will benefit this strategy.

Gamma: This strategy will have a short Gamma position, so any upside movement in the underline asset will have a negative impact on the strategy.

How to manage Risk?

A Bear Call is exposed to limited risk; hence carrying overnight position is advisable.

Analysis of Bear Call Options strategy:

A Bear Call Spread strategy is limited-risk, limited-reward strategy. This strategy is best to use when an investor has neutral to bearish view on the underlying assets. The key benefit of this strategy is the probability of making money is higher.

 

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What Stocks/Shares (Equity) Are And How Do Shareholders Make Money?

how do Shareholders Make Money
by Priyanka Sharma 05/08/2017

Jargon is the biggest hurdle to every new investor, particularly when it comes to those who want to invest in stocks. For that reason, it's important that before someone starts focusing on losses and gains, or the BSE versus the NSE, it's important to understand what stocks really are and what they represent. You can't make any money until you grasp the fundamentals of the tools you're working with, after all. 

Put simply, stocks represent a share in a company. If someone goes online and buys a share of ONGC stock then that individual now has a stake in how well ONGC does. If the company does well, the investor does well. If the company does poorly, then the investor can lose money. How much one stands to gain or lose depends on how much stock that person has in the company, and how that particular company performs.

Let's use an example to make this a little bit clearer. Say that Company ABC wants to attract investors. As such it divides itself up into 5,00,000 shares of stock. For every person who buys stock, that money goes to the company so it can hire new employees, build new stores and generally attempt to get a bigger share of the market. Seen this way, it's clear that trading stock is great for the company. but how do you, the investor, make money?

Method 1: Make Money Trading Stocks
Trading stocks is the most well-known way to make money on the stock market. The price of a stock is liquid, climbing and falling within the space of days or even hours. The trick to make money as a trader is to buy the stock when its price is low, and to sell it when the price rises. So, say that a stock broker heard Reliance Industries is claiming a bigger part of the market and it's poised to rebound from a slump. He or she might buy stock at Rs.50 a share, and wait. If the stock goes up then the broker can sell it at a profit. So if the stock climbs to Rs.90 a share the broker has made a Rs. 40 per share profit. That's not terribly impressive for a single share, but if the broker purchased 100 shares, or 1,000 shares then that profit is going to go up pretty quickly.

It doesn't matter whether you hang onto a stock for an hour, a year or a decade; if you sell it for more than you paid for it you made a profit.

Method 2: Making Money With Stock Dividends
When someone is a stockholder in a company, that company's profits are also the stockholder's profits. The increasing value of a stock is just one instance of this. Another may be dividends paid to shareholders by the company. In plain English, that means that every quarter the company will take a segment of its profits, split it up and give those profits to stockholders according to how much stock someone has. The more profit the company makes, the more money the stockholder gets paid at the end of the quarter. The ideal situation for you to be in is to hold stock in a company that pays dividends, and which is making record profits. If you hold onto your shares then as long as the company is making money, you're making money. In essence you're being paid to own the stock, because when you bought it you paid for a share of the company. That share of the company comes with your own little piece of the profits pie.

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Important Points you should see before investing in shares

Important Points you should see before investing in shares
by Nutan Gupta 01/09/2017

An individual invests in a stock in order to earn profit. It is very disheartening when you invest your hard-earned money in a stock which doesn’t give you desired returns. It is really important to do all the research before you choose to invest in a particular stock.

Here are a few things to check before you choose to invest in a stock.

1. Company background

Read about the company that you want to invest in. Find out what their business is. Visit their website, read news articles related to the company.

2. Financial performance of Company

It is important to analyse the past performance to understand how the company has grown over the years. Read the balance sheets to see how their balance sheets have grown in the past.

3. Stock value

There are ways to find out whether a stock is over or undervalued. Some basic methods would include Price to Earning ratio (P/E ratio), Price to Sales Ratio that helps one understand if the market value of the stock is in line with the growth trends of the company.

4. Industry outlook

Read about the competitors and peers of the company. Finds out what competitive edge your company has over the others. Find out if the advantage is sustainable. Find out about the market share, and overall performance of the industry that they operate in. Look for regulatory, political factors that may impact the industry.

5. Promoter check

Always read about the people who are running the company. Find out their background and how long they have spent with the company. Frequent changes in the top management, inexperienced top managers may be poor indicators while picking the right stock.

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The ABC’s of Investing

ABC's of Investing
by Nutan Gupta 25/09/2017

The money that you earn is partly spent and the rest is saved for a rainy day. Savings refer to the funds that are kept aside in safe custody, such as a savings account. Instead of keeping this money idle, you can invest your savings in various financial instruments which will pay you a hefty return in the near future.

The question that arises now is how and where to invest this money. Potential investors can always take the help of a financial advisor and an investment advisor, both of who are capable of providing detailed knowledge on the subject on investment and investing money. Investors can start investing after fulfilling the following simple steps:

  1. Obtaining documents relating to Personal Identification Proof and Address Proof.
  2.  Approaching intermediaries like a broker, RM etc.
  3. Filling up the KYC form and furnishing the details required.
  4. Filling up of the broker-client agreement.
  5. Opening a DEMAT Account and linking it with a savings account.

As soon as these steps are completed, an investor can start investing in the financial market.

The investment options can be well classified into 2 parts. They are:

  1. Physical assets: It comprises of tangible items like real estate, commodity, goldand silver in the form of jewelry and even antiques. 
  2. Financial assets: It comprises of FDs with banks, small savings instruments with the post offices, provident fund, pension fund, money market instruments and capital market instruments.

The money market gives the scope of short term investment options. It deals with debt instruments such as bills of exchanges, commercial bills, treasury bills, certificate of deposits etc. These have relatively low risk and relatively low returns. However, they are one of the safest investment options, especially for those investors who want to play safe.

A capital market is an option for long term investment. The various instruments of capital market are shares of companies (equity), mutual fundsSIP investmentderivatives market, IPOS, etc. These have a higher risk and higher returns in comparison to the instruments of the money market. Although stock investing is considered to be more rewarding, the high risk factor associated with it can result in loss if there is a downswing in the activities of a company.

The investment strategies of an individual depend on certain factors, such as:

  1. The risk taking appetite of investor
  2. The time horizon of investment
  3. Expected return
  4. Need for investment

Investments make our fund grow over a period of time whereas savings is just idle cash. Our short term needs can be fulfilled with the help of our savings but for the achievement of our long term financial goals, investment is a must. This is only possible with financial planning.

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What is the right age to buy a term life insurance cover?

What is the right age to buy a term life insurance cover?
by Nutan Gupta 01/10/2017

Death comes knocking at the door without any prior notice. The death of the only breadwinner of the family brings the family into severe financial crisis. This is the time when you realise the importance of a term insurance policy the most. A term insurance plan secures the life of your loved ones and helps them to meet their day-to-day expenses. It is always better to buy a term insurance plan early in life as an individual gets immense benefits for starting early. Also, the premium charges are also low when you are young.

Let’s take a look at the different ages and factors that one should consider while buying a term insurance.

20’s

During the 20s, an individual just steps into his professional life and is relatively debt free. He has lesser family responsibilities and buying a term cover at this age can help him pay off his education loans if any. Moreover, term insurance premiums are less expensive when an individual is young.

30’s

An individual, in his 30s, tend to have family and kids. While his income is higher at this age, the responsibilities are much more. He may have financial liabilities like home loan, car loan etc. The premium will tend to be slightly higher, given the family responsibilities.

40’s

During this age, an individual’s long term financial liabilities like a home or car loan is paid-off. However, he may have higher responsibilities like his child’s higher education or his own retirement planning. It is better to opt for a cover which provides a greater coverage and financial protection. The cover should be able to take care of your family expenses after your death.

50’s

When an individual reaches this age, his children already start earning and most of the debts are paid-off. Family members are not financially dependent on your earnings. During this age, what an individual is most concerned about is his retirement. At this age, the best option for an individual is to buy an endowment plan which will help him save and give him a lump sum amount on maturity.

Term Insurance Premium amounts for a cover of Rs. 50 lakh

Age Premium Amount
22 Rs. 4,270
32 Rs. 5,455
42 Rs. 9,606
52 Rs. 17,534

The above table shows the difference in premiums as per the age of an individual. As the age increases, premium increases.

Conclusion

Age plays a major role in deciding the amount of your term insurance. The biggest mistake an individual makes is to not opt for a substantial cover for the family. One should make sure that the term cover takes care of all the basic necessities of the family in case of the sudden demise of the policyholder.

Get a Term Insurance Cover Now!

Next Article

Tax Saving Investments and their Features

Tax Saving Investments and their Features
by Nutan Gupta 01/10/2017

This is the time of the year when you start getting calls from the HR of your company asking for investment declarations. If you have not made any investments yet, here is the list of instruments where you can invest.

Instrument Investment Section of IT Act Lock-in Period Returns Risk Taxation at Maturity
ELSS ELSS is a type of mutual fund scheme where most of the fund corpus is invested in equities or equity-related products. 80C 3 years Not fixed, depend upon the performance of equity market. However, in the past, ELSS has given average returns of 12-14%. Carries some risk Tax-free
PPF It is a type of investment which is provided by the Government of India 80C 15 years The rate of returns changes as per government policies.

Current returns - 8.1% compounded annually
Risk-free Tax-free
NSC NSC are bonds issued by the government for small savings and one can purchase these bonds from post offices. 80C 10 years The interest rate on NSC is decided by the government every year. It is linked to the yield of 10-year government bonds.

The current interest rate is 8%.
Low Risk Interest is Taxable
Pension Mutual Funds Pension Mutual Funds invest 40% of the money in equity and 60% in debt instruments. 80C Until you reach the age of 58 The returns in pension mutual funds are not fixed as it depends on the performance of the equity and debt market. Pension mutual funds have given an average return of 8-10% for a 5-year and 10-year period. Carries some risk Tax-free
Tax Saving FD It is a special fixed deposit made with any bank. 80C 5 years The interest rate varies from one bank to another. It usually ranges from 6.5-7.5%. Risk Free Interest earned is taxable
Rajiv Gandhi Equity Saving Scheme Exclusively for first time retail investors. Individuals with an annual income below Rs. 12 lakh can invest. 80CCG 3 years Depends on the performance of equity markets. Carries some risk 50% of the invested amount