Option Strategies

Bear Call Spread

Introduction

Bear call spread, also known as short call spread, consists of selling an ITM call and buying an OTM call. Both calls have the same underlying Equity and the same expiration date. The ITM call serves as a hedge for the OTM call. The bear call spread profits from a drop in underlying asset price.

Implementation

Follow these steps to implement the bear call spread strategy:

  1. In the initialize method, set the start date, end date, cash, and Option universe.
  2. Select Language:
    def initialize(self) -> None:
        self.set_start_date(2017, 2, 1)
        self.set_end_date(2017, 3, 5)
        self.set_cash(500000)
    
        self.universe_settings.asynchronous = True
        option = self.add_option("GOOG", Resolution.MINUTE)
        self._symbol = option.symbol
        option.set_filter(lambda universe: universe.include_weeklys().call_spread(30, 5))

    The call_spread filter narrows the universe down to just the two contracts you need to form a bear call spread.

  3. In the on_data method, select the expiration and strikes of the contracts in the strategy legs.
  4. Select Language:
    def on_data(self, slice: Slice) -> None:
        if self.portfolio.invested:
            return
    
        # Get the OptionChain
        chain = slice.option_chains.get(self._symbol, None)
        if not chain:
            return
        
        # Select the call Option contracts with the furthest expiry
        expiry = max([x.expiry for x in chain])
        calls = [i for i in chain if i.expiry == expiry and i.right == OptionRight.CALL]
        if not calls == 0:
            return
    
        # Select the ITM and OTM contract strike prices from the remaining contracts
        strikes = [x.strike for x in calls]
        otm_strike = max(strikes)
        itm_strike = min(strikes)
  5. In the on_data method, select the contracts and place the orders.
  6. Approach A: Call the OptionStrategies.bear_call_spread method with the details of each leg and then pass the result to the buy method.

    Select Language:
    option_strategy = OptionStrategies.bear_call_spread(self._symbol, itm_strike, otm_strike, expiry)
    self.buy(option_strategy, 1)

    Approach B: Create a list of Leg objects and then call the combo_market_order, combo_limit_order, or combo_leg_limit_order method.

    Select Language:
    itm_call = [x for x in calls if x.strike == itm_strike][0]
    otm_call = [x for x in calls if x.strike == otm_strike][0]
    
    legs = [
        Leg.create(itm_call.symbol, -1),
        Leg.create(otm_call.symbol, 1)
    ]
    self.combo_market_order(legs, 1)

Strategy Payoff

The bear call spread is a limited-reward-limited-risk strategy. The payoff is

COTMT=(STKOTM)+CITMT=(STKITM)+PT=(COTMTCITMT+CITM0COTM0)×mfee
whereCOTMT=OTM call value at time TCITMT=ITM call value at time TST=Underlying asset price at time TKOTM=OTM call strike priceKITM=ITM call strike pricePT=Payout total at time TCITM0=ITM call value at position opening (debit paid)COTM0=OTM call value at position opening (credit received)m=Contract multiplierT=Time of expiration

The following chart shows the payoff at expiration:

Strategy payoff decomposition and analysis of bear call spread

The maximum profit is the net credit you receive from opening the trade, CITM0COTM0. If the price declines, both calls expire worthless.

The maximum loss is KOTMKITM+CITM0COTM0, which occurs when the underlying price is above the strike prices of both call Option contracts.

If the Option is American Option, there is a risk of early assignment on the contract you sell.

Example

The following table shows the price details of the assets in the algorithm:

AssetPrice ($)Strike ($)
OTM call26.901197.50
ITM call57.801125.00
Underlying Equity at expiration1078.92-

Therefore, the payoff is

COTMT=(STKOTM)+=(1078.921197.50)+=0CITMT=(STKITM)+=(1078.921125.00)+=0PT=(COTMTCITMT+CITM0COTM0)×mfee=(00+57.8026.90)×1001.00×2=3088

So, the strategy profits $3,088.

The following algorithm implements a bear call spread Option strategy:


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