Bear Call SpreadA Bear Call Spread is a great way to profit from a stock as the stock is going down. It is a way which we can be partially bearish on a stock, but we do not need the stock to fall in order for us to make money. When we sell this spread what we actually do is buy an out of the money call and sell another call with a lower strike price. The lower call that we sold will be worth much more then the higher call that we bought, so our profit comes from the difference.
Max Profit A bear call spread has a Max Profit, this is the most you can possible make from the trade. So if you buy a $90 call for $1 and sell an $85 call for $1.70 your max profit would be $.70. Max Loss In addition to having a max profit this spread also has a max loss. In the above example we sold the $85 call and bought the $90 call. The difference between this spread is $5 so $5 is the maximum loss, minus the $.70 that we made of course. Expiration and Exercising All Spreads will eventually either expire or become exercised by a certain date. With a bear call spread you want the stock to stay under the price that you sold. So in this example you want the stock to stay under $85 by the time the spread expires. If you do you realize your Max Profit. If the stock rises above that level your spread might be exercised and you would receive the Max Loss or in this case $4.3 ($5 - $.70). Probabilities
This is a high probability way to trade because the stock does not need to go down for you to make money. If you sell an out of the money put the position could be profitable weather it goes down, stays sideways, or goes up a little, as long as it stays below the strike price you sold. |
