 Bear Call Spread Option Strategy
When the market is volatile and you are moderately
bearish on it, you might consider a Bear Call Spread. This
strategy involves selling a call option at one strike price
and buying a call on the same asset at a higher strike
price (further out-of-the-money). Usually both options will
have the same expiration date. This is also referred to as
a Bearish Credit Spread.
This strategy has a profit/loss picture that is similar to
a Bear Put Spread, however in this case, there is a net
premium that goes into your trading account when you
establish the position, whereas with the Bear Put Spread,
you are paying out a premium when you establish the
position. Like the Bear Put Spread, this strategy has
limited risk but also limited profits.
This strategy is a bearish strategy, like selling naked
calls, that places premium into your account when you
establish the position. However it limits your risk by the
purchase of lower priced calls, protecting you if the price
goes up significantly.
With this strategy, your potential profit is limited to the
premium you collected for the calls you sold less
commissions and the premium you paid for the calls you
bought. Your potential losses are limited to the difference
between the strike prices multiplied by 100 times the point
value of the contract, less the cost of establishing the
position. An option calculator such as Option-Aid performs
these calculations for you instantaneously.
When we initiate a Bear Call Spread, the call we buy has
the same expiration date, with a higher strike price (at a
price point that we feel sufficiently limits our risk,
without significantly lowering the premium we are
collecting.
It is also important to cover risks and caveats of this
strategy.
The risk of this position is limited and known as
described above. Remember that the commission you
pay for this position will be higher than the commission
for a straight option play, because you are initiating two
related option transactions.
When you initiate a Bear Call Spread, you are limiting
your upside potential. If the asset price drops
significantly, then you aren't able to fully participate in
that gain like you would if you had purchased a put.
It is important to analyze your expectations for the
underlying asset and for the market before selecting your
strategy.
When you are analyzing potential option positions, it
helps to have a computer program like Option-Aid that
swiftly calculates volatility impacts, probabilities,
statistics, and other parameters of interest. These
programs can pay for themselves with the first trade that
they help you with.
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