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:
- In the
initialize
method, set the start date, end date, cash, and Option universe. - In the
on_data
method, select the expiration and strikes of the contracts in the strategy legs. - In the
on_data
method, select the contracts and place the orders.
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.
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)
Approach A: Call the OptionStrategies.bear_call_spread
method with the details of each leg and then pass the result to the buy
method.
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.
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=(ST−KOTM)+CITMT=(ST−KITM)+PT=(COTMT−CITMT+CITM0−COTM0)×m−feeThe following chart shows the payoff at expiration:
The maximum profit is the net credit you receive from opening the trade, CITM0−COTM0. If the price declines, both calls expire worthless.
The maximum loss is KOTM−KITM+CITM0−COTM0, 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:
Asset | Price ($) | Strike ($) |
---|---|---|
OTM call | 26.90 | 1197.50 |
ITM call | 57.80 | 1125.00 |
Underlying Equity at expiration | 1078.92 | - |
Therefore, the payoff is
COTMT=(ST−KOTM)+=(1078.92−1197.50)+=0CITMT=(ST−KITM)+=(1078.92−1125.00)+=0PT=(COTMT−CITMT+CITM0−COTM0)×m−fee=(0−0+57.80−26.90)×100−1.00×2=3088So, the strategy profits $3,088.
The following algorithm implements a bear call spread Option strategy: