Bear Call Spread TUTORIAL [Vertical Spread Options Strategy]

in this video I'm going to visually explain to you exactly how the bear call spread option strategy works we're gonna walk through numerous historical trade examples using historical option data so you can see how the bear call spread strategy has performed in various stock price scenarios lastly I'm gonna show you how to set up the bear call spread using the tasty works desktop trading platform so be sure to stay tuned the bear call spread option strategy is a limited risk option strategy that profits as long as the stock price does not increase through the call spreads strike prices other names for the bear call spread include the short call spread called credit spread or simply selling a call spread the bear call spread strategy consists of two option components the first is selling a call option and the second is buying a call option at a higher strike price in the same expiration cycle as the call that you sold compared to selling a call option by itself or selling a naked call options by purchasing another call option at a higher strike price you define the risk of the position which means it doesn't matter how much the stock price increases your risk is known before you enter the trade when selling naked call options the loss potential is unlimited because there's no limit to how much a stock's price can increase and that means a call option on that stock also has no price limit since call options increase in value as the stock price increases the downside of buying a call option against the call that you've sold is that you reduce the amount of option premium that you collect for entering the position which means you have less profit potential as an options trader the benefit of having limited loss potential on the upside comes at the cost of having lower profit potential compared to just selling a call option all by itself let's look at a hypothetical short call spread position and look at the expiration profit and loss graph so you can see how the trade is expected to perform based on various stock prices at expiration for this example the stock price is at $300 at the time of selling the call spread and I'm going to construct a bear call spread position from the following options to construct the bear call spread position I'm going to sell the 310 call option for $8.00 and I'm going to purchase the 3/2 call option for $5.00 since I collected $8 for selling the 310 call option and paid $5 for purchasing the 320 call option the net credit that I receive for entering this trade is three dollars let's go ahead and look at the expiration profit and loss graph for this particular option position in this graph we're looking at the profit and loss potential for this particular bear call spread position based on various stock prices at the time of expiration but where do these profit and loss figures come from the maximum profit potential of a bear call spread position is the net credit received times 100 the $300 profit potential in this scenario stems from the $3.00 credit that I received and if I multiply that by 100 I get a maximum profit potential of 300 dollars when you sell an option the best case scenario is that it expires worthless and in the case of a spread the best case scenario is that both of the options in the spread expire worthless and therefore the spread as a whole expires with a value of $0 in the case of this 310 320 call spread both options in the spread will expire worthless at any price equal to or below the short call strike price of 310 dollars if the stock price is at or below 310 dollars at the time of expiration the 310 call and the 320 call will both expire worthless which means the 310 320 call spread will expire with a value of $0 if I sell the spread for $3.00 and at expiration it is worth $0 I will have a three dollar profit per spread and when I multiply it by the option contract multiplier of 100 I get a $300 profit per call spread that I sold the maximum loss potential of a bear call spread position is the width of the strikes less than net credit received at the time of entering the trade times the option contract multiplier of 100 in this example the width of the strikes is $10 since I sold the 310 call and I purchased the 320 call and the distance between those strike prices is $10 and since I collected $3 for entering the trade the most the spread can move against me is $7 if I sell a spread for $3 and it increase is to a value of $10 that is a $7 movement against me and when I multiply that $7 move against me by the option contract multiplier of 100 I get a maximum loss potential of $700 for every cost bread that I sold the break-even price of a bear call spread position is the short called strike price plus the credit received at the time of entering the trade in this example the short calls strike price is three hundred and ten dollars and I sold the 310 320 call spread for three dollars in premium the short call strike price of 310 plus the credit received of three dollars gives me a breakeven price of three hundred and thirteen dollars at expiration if the stock price is right at three hundred and thirteen dollars the 310 call will be worth three dollars since it will have three dollars of intrinsic value while the 320 call option will expire worthless and as a result the 310 320 call spread will be worth three dollars at expiration and since that's the exact same price that I sold it for I won't have any profits or losses on the trade which options traders call breaking even now that we've looked at a hypothetical bear call spread position let's go through a couple historical bear call spread trades using historical option data so you can see how this strategy performs in action in this example I'm gonna look at a scenario where the bear call spread ends up with the maximum profit potential at expiration here are the trade details at the time of selling the call spread the stock prices at a hundred and nineteen dollars and twenty four cents the options used in this example had 39 days until expiration to set up the bear call spread position I'm going to sell the 120 call option for 3 dollars and 43 cents and I'm going to buy the 125 call option for one dollar and 50 cents the net credit in this example is one dollar and 93 cents since I collected three dollars and 43 cents for selling the 120 call but I paid one dollar and fifty cents for buying the 125 call in this example the maximum profit potential is one hundred and ninety three dollars per call spread sold which comes from the one dollar and ninety three cent net credit times the option contract multiplier of 100 which comes out to a maximum potential of 193 dollars the maximum loss potential is three hundred and seven dollars per spread and that comes from the five dollar spread width so I sold the 120 call option and bought the 125 call option and the distance between those strike prices is five dollars and since I sold the spread for one dollar and 93 cents an increase from 193 to five dollars would represent a three dollar and seven cent move against me in the spreads price and if I multiply that by the option contract multiplier of 100 the loss potential is three hundred and seven dollars per call spread that I sold the expiration breakeven price is 121 dollars and ninety three cents which comes from the short caused strike price of one hundred and twenty dollars plus the one dollar and ninety three cent credit that I received when selling the call spread 120 plus one 93 comes out to a breakeven price of 121 93 if the stock price is exactly at 121 dollars and ninety three cents at expiration the 120 call option will expire with one dollar and ninety three cents of intrinsic value and the 125 call option will expire worthless which means the net value of the 120 125 call spread would be one dollar and ninety three cents let's take a look at how this trade performed on the top of this chart we're looking at the changes in the stock price relative to the call spreads strike prices and on the bottom of this chart we're looking at the price changes of the call spread itself this example demonstrates how a bear call spread works when everything goes right immediately after selling the call spread the stock price began to slide to lower and lower levels which resulted in a decrease in the call spreads price around 20 days to expiration we can see that the stock price rallied back to its initial starting point but we can see the call spread had still lost value as time passes all options lose their extrinsic value and at expiration and options price will only consist of its intrinsic value if the stock price is below a call spread strike price that call options value is 100% extrinsic which means a hundred percent of that options value will decrease to zero if the stock price remains below that strike price as time passes this demonstrates that if the stock price is below the call spread strike prices as time passes the spreads value will steadily decline toward zero dollars and if the stock price is below the call spreads strike prices at expiration the spread will expire worthless and the trader will have the maximum profit potential for selling that call spread in this example we can see that the stock price was below both call spreads strike prices at expiration in which case the options expired worthless at expiration since the 120-125 call spread was worth $0 this represents a gain of 1 dollar and 93 cents per call spread that was sold which as we've just discussed results in the maximum profit potential of one hundred and ninety three dollars per call spread that was sold in this next example we're gonna look at a bear call spread position that ends up with the maximum loss potential at expiration here are the trade details at the time of selling this call spread the stock price was at 598 dollars and 50 cents in this example the options used had 49 days until expiration to set up the bear call spread I sold the 635 call option for 16 dollars and 35 cents and I bought the 705 call for $2.99 the net credit in this example is $13.30 and that's because I collected 16 dollars and 35 cents for selling the 635 call and I paid $2.99 for buying the 705 call 1635 - two dollars and 99 cents comes out to 13 dollars and 36 cents the maximum profit potential is one thousand three hundred and thirty six dollars and that comes from the 13 dollar and 36 cent net credit that I received times the option contract multiplier of 100 which comes out to a maximum profit potential of one thousand three hundred and thirty-six dollars this call spreads maximum loss potential is five thousand six hundred and sixty four dollars which comes from the 70 dollar spread with less the thirteen dollar and thirty six cent net credit received at the time of entering the trade multiplied by the option contract multiplier of 100 if I sell a seventy dollar wide call spread for 30 thirty-six cents an increase from 13 dollars and 36 cents to $70 which is the spreads maximum value at expiration represents a loss of fifty six dollars and 64 cents per spread and when I multiply that by the option contract multiplier of 100 I get a maximum loss potential of five thousand six hundred and sixty four dollars the expiration breakeven price for this call spread position is six hundred and forty eight dollars and thirty six cents since the bear call spread is a bearish trading strategy it makes complete sense that this trade did not do so well because the stock price increased substantially over the entire trade duration over the first few weeks of the trade we can see that the stock price increased to the short call strike price of six hundred and thirty five dollars at which point the spreads price increased to about twenty three dollars at a spread price of twenty three dollars the unrealized loss at that moment would be nine hundred and sixty four dollars per spread that was sold if the trader decided that the position was no longer favorable at that moment they could have bought back the spread for twenty three dollars at which point they would lock in a nine hundred and sixty four dollar loss per call spread that was sold for the sake of this example let's say the trader continued to hold the position in anticipation of a stock price decrease in the near future unfortunately the stock price continued heading higher and increased significantly over the remainder of the trade at expiration the stock price was right below the long call to strike price of seven hundred and five dollars which means this call spread essentially expired with its maximum value of seventy dollars with a spread price at expiration near $70 the trader in this example would have realized almost the maximum of lost potential of five thousand six hundred and sixty four dollars per call spread that they sold now that we've looked at profitable and unprofitable bear call spread positions let's go ahead and set up a bear call spread using real brokerage software and in this example I'm going to use the tasty works trading platform be sure to check the link in the description to learn how you can get one of our paid courses completely free when you open and fund your first tasty works brokerage account using the project option furro code I've just opened up the tasty works trading platform and currently I'm looking at the chart of QQQ which is the Nasdaq ETF as we can see here the Nasdaq ETF has been on quite a tear recently and is currently trading at a hundred and eighty three dollars per share so to set up a potential bear call spread position on QQQ all I have to do is click on the trade tab since QQQ is already selected here everything that pops up is going to be related to QQQ so right now we're looking at the trade page for QQQ which simply has a list of all the different expiration cycles that I can choose as an options trader for this example I'm going to choose the 67 day expiration cycle which is August 2019 and I don't need all the strike prices open since there are a ton here and to close up some strike prices and only show a few of them I can click on this drop down menu and for this example I'm just gonna click 20 to show 20 strike prices actually I'm gonna go to 30 so for this example let's just say that I thought QQQ would stay below one-hundred and ninety dollars per share through expiration in 67 days to start the bear call spread I'm going to choose the 190 strike price to sell so I'm gonna click on the bid price on the 190 call option and that queues up in order to sell the 190 call and then to complete the bear call spread position I have to purchase another call option at a higher strike price which means I need to click on the asking price for one of the call options at a higher strike price and then the 190 call for this I'm going to do a $5 wide call spread which means the strike width is five dollars and that means I'm gonna have to purchase the 195 call and to queue that up I'm gonna go ahead and click on the ask price of one dollar and 25 cents on the 195 call option and now I have an order queued up to sell the 190 195 call spread for a price of one dollar and forty six cents so this price that is changing right here this is the mid price of this spread which basically takes the mid price of the option I'm trying to sell it takes the mid price of the option I'm trying to purchase and then calculates the mid price of the entire spread for me which comes out to one in 46 cents now if I were to sell this call spread for $1 and 46 cents my maximum profit potential would be a hundred and forty six dollars per spread that I sell since if we take the one dollar and forty six cent net credit and multiply that by the option contract multiplier of 100 we get a maximum profit potential of one hundred and forty six dollars per call spread that I sell the maximum loss potential is going to be the difference between the strike prices which is five dollars less than net credit received of one dollar and forty six cents which comes out to a maximum loss per spread of three dollars and fifty four cents and if I multiply that $3 and fifty four cent maximum loss per spread by the option contract multiplier of 100 I get a maximum loss potential of three hundred and fifty four dollars per spread if I wanted to visualize the risk and reward payoff of this particular spread I can go to the top left of the platform click on the curve view click on analysis and then this will show me the expiration payoff graph for this particular bear call spread position so as we can see here at any price equal to or below the short call strike price of a hundred and ninety dollars this spread will expire worthless and the maximum profit potential of one hundred and forty six dollars per spread will be realized unfortunately if QQQ is above one hundred and ninety five dollars at expiration in 67 days the 190 195 call spread will be worth five dollars and if I sell this spread for one dollar and forty six cents and it increases to five dollars that's a three dollar and fifty four cent loss per spread that I sell which comes out to an actual loss of three hundred and fifty four dollars per call spread that I sell so in this example if I sold the 190 195 call spread in QQQ that expires in sixty seven days and I collect one dollar and forty six cents for this spread the maximum profit potential is a hundred and forty six dollars and the maximum loss potential is three hundred and fifty four dollars now the maximum profit potential of one hundred and forty six dollars might seem small relative to the maximum loss potential of $54.00 but the reason that this spread has less profit potential than the loss potential is because it's such a high probability trade and I know that because QQQ is currently at a hundred and eighty three dollars and 33 cents and the maximum profit potential will occur if QQQ is anywhere below one hundred and ninety dollars at expiration in 67 days so in other words QQQ can increase about seven dollars over the next 67 days and this spread will still realize the maximum profit potential of one hundred and forty six dollars per spread on the bottom left here on the tasty works platform it gives me this p o p or probability of profit figure and it's telling me the probability of profit for this spread is estimated to be 69 percent this means that if I sell this one ninety one ninety five call spread I have an approximate 69 percent probability of making at least one penny on the trade if I were to sell the spread and hold it through expiration in 67 days to wrap up this video I'm going to go through some frequently asked questions that traders have in regards to selling call spreads the first question is can you close a call spread before expiration or do you have to hold the position all the way through expiration once you've entered the position the answer is that you can close option positions at any moment before expiration and you never have to hold an option position through its expiration date even if you already entered the trade since selling a call spread consists of selling a call option and buying a call option at a higher strike price to close a bear call spread all you have to do is buy back the call that you sold and sell the call that you purchased and by doing so you will effectively lock in whatever profit or loss the spread has at the moment of closing the trade for instance if you sell a call spread for $11 and it's price falls to $8 and you decide you want to close the spread if you buy back the spread for $8.00 you will lock in a $300 profit per call spread since you sold the spread initially for $11 but closed it at a later date for $8.00 the next question is can you let a call spread expire in the money or is it advisable to close it or expiration the answer is that you can hold a short call spread through expiration if the options are in the money but there are some things that you should be aware of first if both call options are in the money meaning the stock price is above the long called strike price at expiration and you hold those options through expiration you will not end up with any share position however your brokerage firm will still charge you exercise and assignment fees which in most cases is going to be something that you're gonna want to avoid if only the short call option is in the money at expiration and the long calls are out of the money meaning that the stock price is in between the two strike prices at the time of expiration if you hold the short call options through expiration you will end up with a short stock position for example if you sold six call spreads that means you have six short call options as part of that spread and if those six short calls are in the money at expiration while the long calls are out of the money if you hold those six short calls through expiration you will end up with six hundred shares of short stock if you decide to hold the calls through expiration again that's probably something you don't want to happen so personally I always close spreads before their expiration date especially if they are in the money that's gonna be a wrap on the bear call spread option strategy video everybody I really hope you enjoyed this video and that you're more comfortable with how the strategy works especially setting it up on whatever brokerage platform you're currently using be sure to check the links down in the description below for additional resources I'm Chris from Project option comm and I will see you in the next video [Music] [Applause] [Music] [Applause] [Music]

Channel: projectfinance

Views: 35,920

Rating: 4.919075 out of 5

Keywords: bear call spread, call spread, bear call spread options strategy, call credit spread, short call spread, credit spread, call vertical spread, vertical spread, options trading strategies, options trading, stock market, finance, projectoption, call options, options, bearish

Id: qfai6_DvFMw

Length: 21min 54sec (1314 seconds)

Published: Wed Jun 19 2019