The 5 Points of a Bear Call Spread
Hey, Traders from around the world! I trust you are doing sensational. What a beautiful trading season it has been. In this article, I'm covering a semi-advanced option strategy. Let's get into it.
What: A bear put spread is a non-directional strategy involving two option legs: a call that you purchase and one that you sell. What I like about bear call spreads is it's a limited return, limited risk strategy. It requires much less margin than selling a naked call and can be done as an ITM or OTM strategy.
How: If you are bearish to non-directional on a trade and perhaps the stock you are charting is reaching a resistance and pretty much just trading sideways. An example: NFLX has been on a nice bullish run and is trading into an obvious and prior resistance level. NFLX had multiple up days in a row and you analyze that some selling likely could come in. You sell to open the $135 call and then simultaneously buy to open the $136 call, expiring in December. Selling the $135 call would bring in money: approximately $1.05 per contract. The $136 strike would cost you approximately $0.96 cents. Therefore, the total credit on this trade is $1.05 - $0.96 equals $0.09 per contract. This is your maximum reward. Your max risk is $136-$135 (times the amount of shares controlled by options.)
When: In my opinion, I get into bear call spreads on few occasions. When a stock is in a bearish trend, when a stock is approaching a confirmed prior resistance, or after a nice bearish gap down. Credit spreads are different than debit spreads. Credit spreads bring money in and do have margin associated with them. In this particular credit spread you want the stock to close below the strike (call) you sold on the day of expiration.
Where: Above resistance. The time frame of the trade is up to you. I like to keep the expiration dates the same and usually sell six weeks or less of time. I also prefer for the stock to be below the 100/200 simple moving averages on the daily chart or trading into a very strong support with some bearish candles forming there.
Why: If the stock is trading into a resistance of some kind and you are expecting some selling for a short time period. You anticipate it could go down, or just trade sideways. This is a probability-based strategy. You're really asking yourself 'What is the probability this stock stays below the call I am selling by the desired expiration date?â€ Credit spreads can be and often are a tad more complicated than debit spreads. If you are interested in getting more solid details on them, hop over to this fun video about credit spreads I made, free for the world. Enjoy!