“Bear Call (Credit) Spread” involves selling a OTM (Out of the Money) call option of a underlying stock and buying further out (most often the next strike price) OTM call option for protection. These selling and buying different strike price call options (known as ‘spread’) creates a credit and that’s the profit for the trade if successful.
To simplify it, let’s say you received $1.45 per share for the Call option you sold and paid $1.30 per share for the call option you bought. That has created $0.15 credit ($1.45 – $1.30 = $0.15 money in your pocket) to your account and that would be your profit for the trade.
Below is the example of the trade I took this week.*
Beautiful thing about this strategy is that, even if the prices of the underlying security go bit higher, go down or go sideways, you will still be profitable. You don’t have to hold the crystal ball and predict the direction of the stock to make any money.
RUT (Russell 2000 Index – is a small-cap stock market index) traded outside the upper Bollinger band from Monday 24 April 17 till Thursday 27 April 17. Thursday 27 April it showed bit of weakness (spinning top candlestick pattern) and Friday 28 April it came down inside the Bollinger band pretty strongly. General tendency is that once prices trades outside the Bollinger band, it comes back inside fairly quickly. Like an elastic band comes back to its original shape once you release it after stretching. Friday 28 April, “sell signal day” flashed with my technical indicator set ups. All it means is that prices are ready to have a short term pull back. Observed the market on Monday 01 May to see how it’s reacting, RUT opened at $1401 and closed at $1407.36, didn’t actually follow through the sell signal. However on Tuesday 02 May it opened at $1407.54 and started going down and that’s when I have decided to take the trade.
Sold $1430 strike price call option, which was above the recent high from Wednesday 26 April and above the upper Bollinger band. Bought $1435 strike price call option to protect from theoretically unlimited loss (capped my loss $5.00 per share) in case prices all of a sudden jumps up and hits $1430 by Friday 05 May. It was a weekly options expiring 06 May 17, 06 May is Saturday and market is closed, so options contract gets settled based on Fridays market close. Received $0.15 credit per share and that’s my profit for this trade.
| Side | Quantity | Symbol | Expiration date | Strike price | Type |
| SELL | 10 | RUT | 06-May-17 | 1430 | CALL |
| BUY | 10 | RUT | 06-May-17 | 1435 | CALL |
So, as long as prices stay below $1430 (could go up but not above $1430, go down or stay same around $1404 level till Friday 05 May), I would make money. Friday 05 May it closed at $1396.96
Capital requirement to do this trade was $5000 and have received $0.15 credit per share.
| Capital requirement | $5,000 | 10 contracts, each options contract consist of 100 shares, $5 spread between strike prices (10 x 100 x $5 = $5000). |
| Net profit | $128.05 | ($0.15 x 100 x 10 – $21.95 commission = $128.05 |
That’s 2.56% return on the capital invested in 4 days.
*Please note that the trade is now closed. Do not copy and place a trade unless you are an expert and know what you are doing. This writing is only for educational purposes. Trading is risky without proper knowledge, practice, expertise and mentorship.