Market Weakness Is Growing: Time to Look at Bear Call Spreads? A concept image for catching a falling knife by Photo Art Lucas via Adobe Stock With the market coming into a seasonally weak time of year, Bear Call Spreads could be an interesting trade to consider. 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 16th: As you can see, the screener shows some interesting Bear Call Spread trades on stocks such as TSLA, AVGO, BA, GLW and UBER. Let's look at the first line item – a Bear Call Spread on Tesla stock.
Using the October 16 expiry, the trade would involve selling the $360 call and buying the $365 call. That spread could be sold for around $2.00 which means the trader would receive $200 per contract into their account. The maximum risk is $300 for a total profit potential of 66.67% with a loss probability of just 45.0%.
The breakeven price is $362. 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 5.00 – 2.00 x 100 = $300.
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