Hello again, Casey Jensen here at OptionsANIMAL. Now we’re discussing a Bear Call Spread. How does a bear call work? Let’s first talk about it a little
bit. A bear call is a credit spread. You’re really looking at a high probability trade here. I compare it to the game of baseball. Basically, what you’re
trying to do is hit a single or draw a walk or get beaned. You’re just trying to get to first base. Not really trying to hit a home run.
Let’s say we have a stock trading at 38. In this case, what you do is you’d sell a call option at say strike price 40. If you’re looking at the month of
August, strike price 40, we’re going to get paid 80 cents. If the stock stays in this case, below 40 within the next 30 days, we’re going to make an 80 cent
As a little bit of a hedge to this trade, what I will do now is buy an option at strike price 45. That way, in case the stock does go up, at least I know
at that point I have the right to buy the stock at 45 in case I’m obligated to sell it at 40. I don’t want to buy a stock at 70 and be obligated to sell it
at 40. That would be a naked call, we don’t want to do those.
How this would work, if you look at my two instruments now, I’m selling a call option strike price 40, month of August 30 days to expire. I get 80 cents. I
buy a call option as a hedge, strike price 45 in August, 30 days, costs me 55 cents. The total credit I receive is 25 cents. That is our max reward.
You’re looking for these options to expire worthless and you will keep this 25 cent credit or if the stock does drop quite a bit right away in this case,
you can buy these options back and capture a partial profit.
My risk is defined as the difference in the strike prices here. We’ve got 45 minus 40, so 5 dollars a share minus the credit I receive which is 25 cents.
The most I can lose in this trade ifs 4 dollars and 75 cents.