Bear spread with calls

CFA Level III
#1

The Scheswer book says that you can create bear spread with buying call with higher exercise price and selling call with lower exercise price. The book doesn’t give the formulas for profit, max profit, max loss, and breakeven price, except to say that payoff is the mirror image of bull spread. that is not very helpful for someone who is very confused over options in general.

Does anyone know the formulas for bear spread using calls?

thanks a lot!

#2

Geez. Don’t memorize formulas. They’ll drive you crazy.

Start with drawing call playoffs(long high strike short low strike) and add the premium at the end (long prem will be higher than low prem).

This should help.

http://futuresoptionsetc.com/2011/05/bear-call-spread-example-with-payoff.html?m=1

#3

+1

Understand the payoff diagrams for a call and a put, long or short (they’re just mirror opposite). Then just add them up based on the strategy. The max/min loss point should be very obvious from the resulting graph. For example, the max loss for the call bear spread is clearly at the high strike point. Just add up all the payoffs and premiums paid/receive and you’re done. Memorization is crazy!

#4

In the semifinals we have:

  • a 120-strike call at home against an 80-strike call
  • a 105-strike call at home against a 95-strike call

The winner of the first contest will host the winner of the second for the championship.

wink

#5

For me personally I found it easiest to start at the OTM end of the diagram and just think step-by-step what the profit would be as the stock price moves deeper into moneyness. Deep out the money, lose the premium. Hit the first strike, start making money, hit the intermediate strike and bam-bam, double whammy first option puts us flat, second one now losing money. Keep moving down the scale, hit the last strike and back to flat diagram.

#6

Payoff function= max(0,st-xh)-max(0,st-xl)-ch+cl

Max=-CH+CL

Min=XH-XL+CH-CL

Breakeven=XH+CH-Cl

#7

did you chekc out the Schweser video? it does a great job explaining the various strategies. You don’t have to remember all those formulas

#8

did you check out the Schweser video? it does a great job explaining the various strategies. You don’t have to remember all those formulas

#9

Bear Put Spread = Debit Spread ( Its a debit for you, your cash outflow is more than your cash inflow)

Bear Call Spread = Credit Spread ( Its a credit for you, your cash inflow is more than your cash outflow)

Understanding single-leg risk graphs ( like straight call and put) makes any multi-leg strategies easier to understand ( Bear Call, Bear Put, Bull Call, Bull Put, Butterflies, etc.).

#10

I’m usually not a graph guy but they did help in this case.

The formulas, especially in the CFAI text, are confusing as hell.