Monday, June 20, 2011

Options 101: The Bear Call Spread

The bear call spread is a bearish strategy used by traders who want to capitalize on a decrease in the price of the underlying stock. The bear vertical consists of buying a higher strike call and selling a lower strike call. The call options will have the same expiration. The bear call spreads have limited risk and limited profit potential. The total premium received to put on the spread, the credit, is the max profit potential of the spread. The max loss is the difference between the two strike prices minus the original credit received.

The break even underlying stock price is the strike price of the short call plus the credit received.

This is an example of a Wells Fargo $30/$26 October bear call spread. In this call spread, the trader is long the October $30 strike at $0.74 and short the October $26 call at $2.53 for a total credit of $1.74. The max risk is limited to $2.26 to the upside. The max profit potential is limited to the credit, $1.74. The break even price level at expiration is $$27.74.

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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