A bear call spread is a type of vertical spread, meaning that two options within the same expiry month are being traded.
One call option is being sold, which generates a credit for the trader. Another call option is bought to provide protection against an adverse move.
The sold call is always closer to the stock price than the bought call.
As the name suggests, this trade does best when the stock declines after the trade is open.
However, there can be many cases where this trade can make a profit if the stock stays flat and even if it rises slightly.
Bear call spreads are risk defined trades, there are no naked options here, so they can be traded in retirement accounts such as an IRA.
Traders should have a bearish outlook on the stock and ideally look to enter when the stock has a high implied volatility rank.
Let’s take a look at Barchart’s Bear Call Spread Screener for September 6th:
As you can see, the screener shows some interesting Bear Call Spread trades on stocks such as AAPL, TXN, MSFT, NFLX, BAC, PINS and INTC.
Below are the full parameters for this scan:
- Days to expiration: 15 to 60 days
- Monthly Expirations
- Security Type: Stock
- Volume Leg 1: 100
- Open Interest Leg 1: 500
- Moneyness Leg 1: -10.00% to 0.00%
- Breakeven Probability: Above 25%
- Volume Leg 2: 100
- Open Interest Leg 2: 500
- Ask Price Leg 2: Greater than 0.05
Let’s look at the first line item – a Bear Call Spread on Apple stock.
Using the October 20 expiry, the trade would involve selling the $190 call and buying the $195 call.
That spread could be sold for around $2.35 which means the trader would receive $235 into their account. The maximum risk is $2365 for a total profit potential of 88.68% with a probability of 57.9%.
The breakeven price is $192.35. This can be calculated by taking the short call strike and adding the premium received.
As the spread is $5 wide, the maximum risk in the trade is 5 – 2.35 x 100 = $265.
The Barchart Technical Opinion rating is a 72% Buy with a Strengthening short term outlook on maintaining the current direction.
Let’s strengthen the screener by adding only stock with an 80% or greater Sell Rating.
This gives us these results:
Let’s analyze the third result – a Bear Call Spread on Citigroup.
This Bear Call Spread on C stock involves selling the $42-strike October call and buying the $43-strike call.
That spread could be sold for around $0.40 which means the trader would receive $40 into their account. The maximum risk is $0.60 for a total profit potential of 66.67% with a probability of 60.8%.
The breakeven price is $42.40.
The Barchart Technical Opinion rating is a 100% Sell with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
C is showing an IV Percentile of 4% and an IV Rank of 7.35%.
Mitigating Risk
Thankfully, Bear Call Spreads are risk defined trades, so they have some build in risk management. The most the Citigroup example can lose is $60.
Position sizing is important so that a 100% loss does not cause more than a 1-2% loss in total portfolio value.
Bear Call Spreads can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and it’s getting close to expiry.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
