Options Theory: The Bear Call Spread
November 18, 2021
Today’s video goes step-by-step through the bear call spread strategy.
Notes
Bear Call Spread
Aka: Short call vertical credit spread
Bias: 0, -1, High implied volatility, Bear Retracement, Bear Breakout
Structure: Sell an OTM call option while buying a further OTM call in the same month. Use 30 to 45-day options. (Shorter-term is more aggressive)
I’m selling calls that I hope expire worthless. The bet is that the stock stays below the short call strike.
Delta guidelines: The lower the delta, the higher the probability of profit. Generally, sell delta 0.20 or less.
A) Higher POP = Lower Reward = Less Aggressive (lower delta)
B) Lower POP = Higher Reward = More Aggressive (higher delta)
ROI guidelines:
A) 10% return
i) $10-wide spread: $1.00 credit
ii) $5-wide spread: 50 cents credit
iii) $3-wide spread: 30 cents credit.
Spread Width:
A) Most common: $5-wide spread
B) More expensive stock: $10-wide spread
C) $3-wide spread minimum, sometimes I’ll $2.50-wide.
$100 stock
Sell Dec $105 call for $1.25 credit, Delta 0.20
Buy Dec $110 call for $0.60 debit,
Net Credit/Max Reward: 0.65 cents.
Max Risk: $4.35
Sell Dec 105/110 call vertical spread for 65 cents credit.
Risk/Reward Formulas:
Max Reward: Net credit received.
Max Risk: Spread width – net credit ($5 – 65 cents)
Probability of Profit = 1 – short call delta
Trigger: Same as other bear trades. Depends on the patterns. Below prior day’s low or below support
Stop Loss:
1) Exit if stock rises to short strike call
2) Exit if stock breaks above major resistance
Target:
1) Ride to expiration and capture entire profit.
2) Exit if we capture 80% to 90% of max gain. (Buy limit order at 5 or 10 cents).
Read more Options Theory [FREE Content]
Every Thursday our resident options addict, Tyler Craig, will be at the helm to help you demystify derivatives and better understand what truly makes them tick. Options for beginners? Come this way, please. Enlightenment awaits.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
