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 65 strike call at $1.00

                                  Buy one 70 strike call at   $.20

                                                      Net Credit   $.80  

Potential Outcomes:

  • Maximum Profit = Net Credit Received
  • Maximum Profit = $80

  • Breakeven = Short Call Strike + Net Credit Received
  • Breakeven = 65.80

  • Maximum Loss = Difference in Strike Prices - Net Credit Received
  • Maximum Loss = 420

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. It would be ideal to have both options expire worthless. The profit and loss of this trade is limited.