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Bear Call Spreads

Summary

A bear call spread is an options strategy where Thetanuts longs one call option and short another call option with the same expiration date but at a higher strike price. The goal of the bear call spread is for the spot price of the underlying asset to expire below the strike price of the short call option, which allows both calls to expire worthless. Before using this strategy, it is recommended for users to read how Thetanut’s degen vaults work. Please click here to find out more.

When to use the bear call spread?

The bear call spread is suitable for users who are short-term bearish on the underlying asset.

Understanding the risks and rewards:

There are 3 main scenarios when considering using the bear call spread strategy. To illustrate these scenarios, these are the parameters:
  1. 1.
    The initial spot price of ETH is $1,200
  2. 2.
    A user deposits $1,000 USDC into the bear call spread
  3. 3.
    The strike price of the short call option is $1,300
  4. 4.
    The strike price of the long call option is $1,350
  5. 5.
    The weekly yield is 15% ($150)

Scenario 1:

If the settlement price of ETH remains below $1,300
  1. 1.
    Both call options expire worthless
  2. 2.
    Weekly profit = weekly yield = $150
  3. 3.
    Post settlement balance = $1,000 (deposit) + $150 (weekly profit) = $1,150

Scenario 2:

If the settlement price of ETH is $1,325
  1. 1.
    The short call option is exercised while the long call option expires worthless
  2. 2.
    Partial loss is incurred on the deposit = ((settlement price - short call strike price) / (long call strike price - short call strike price)) x deposit x -1 = (($1,325 - $1,300) / ($1350 - $1300)) x $1,000 x -1 =($25/$50) x $1,000 x -1 = - $500
  3. 3.
    Weekly profit = weekly yield + partial loss = $150 - $500 = - $350
  4. 4.
    Post settlement balance = $1,000 (deposit) - $350 (weekly profit) = $650

Scenario 3:

If the settlement price of ETH increases beyond $1,350
  1. 1.
    Both call options are exercised
  2. 2.
    Weekly profit = weekly yield + max loss capped at deposit = $150 - $1,000 = - $850
  3. 3.
    Post settlement balance = $1,000 (deposit) - $850 (weekly profit) = $150