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 $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 July 60 strike call at $5.60
Buy one July 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
65
|
(4)
(5)
|
0
0
|
4
4
|
0
(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.
Options involve risk and are not suitable for all
investors. Prior to buying or selling an option, a person must receive a copy
of Characteristics and Risks of Standardized
Options (ODD). Copies of the ODD are available from your broker, by
calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North
Wacker Drive, Suite 500, Chicago, Illinois 60606. The information on this
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