How does a Bear Call Spread work?Masterful trading Secrets Of Successful Traders Stock And Option Trading. Predict Market Turning Points!
How can anyone use this? Let us start by looking at the chart. This stock has support at $61 and resistance at $69. It has hit resistance and is bouncing off of resistance. We are bearish on this trade. One way to profit is to buy a Put. There is a problem with this. A Put only makes money if the stock goes down, what if the stock stays at $68 or trends up?
What if we buy a $75 call at .75 and sold a $70 call at $1.6. Wow! We just made $.85 (provided the stock stays below $70). Hold on trader .... there are some rules. If the stock goes above $70 we can potentially lose up to the difference between strike price or $5. We could lose $4.15 ($5-$.85). Who wants to bet $4.15 to make $.85? Only if there is a high probability of being right. The odds must be in your favor. What if you were right 90% of the time? Let us see... (.85)*(.9)-(4.15)*(.1)= $.35 This means you make an average of $.35 per trade. hm.... I think I could get used to using a Bear Call Spread, what about you? What happens if the stock does go up? Can you still make money? Probably. Remember, you own Calls and Calls make money when stocks trend up. If the stock breaks through to $72 and you think it will still keep rising, what can you do? First you can buy your $70 Call back for $4. Then you watch your stock rise. Eventually the stock gets to $77. You can now sell your $75 Call for $3.5. Let us Show You The Money. spread ($.85)-$70 call ($4)+$75 call ($3.5)= .35 Hey look you still made money and you were wrong about which direction the stock would trend. Don't you just love the Stock Market! Remember you should always paper trade and test any new strategy before putting real money into the stock market.
 
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