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Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Bear Call Spread

Example: XYZ stock is trading at $63

Outlook: You are moderately bearish on XYZ stock and expect it to go lower in the near term.

Possible strategy: Bear Call Spread:

Sell one 60 strike call at $5.60

Buy one 70 strike call at $1.60

Net Credit $4.00

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock	Short 60 Call	Long 70 Call	Net Credit	Net Profit (Loss)
55	0	0	4	4
60	0	0	4	4
64	(4)	0	4	0
65	(5)	0	4	(1)
70	(10)	0	4	(6)
75	(15)	5	4	(6)

At Expiration:

Maximum Profit = Net Credit Received
Maximum Profit = $400

Breakeven = Short Call Strike + Net Credit Received
Breakeven = 64

Maximum Loss = Difference in Strike Prices - Net Credit Received
Maximum Loss = 70 - 60 -4 = $600

In Summary: The Bear Call Spread strategy is executed when an options trader believes the price of the underlying will decrease moderately in the near term. The profit and loss of this trade is limited.