If
you are feeling generally negative about a stock, bear spreads offer a low risk,
low return strategy. The best way to build a Bear call spread is to use call
options at or near the current market price of the stock. Bear call spreads will
profit when the stock price goes down, and are typically created by selling at
the money calls and buying out of the money calls.
Example:
Using QQQ the Nasdaq 100 Tracking Index we can create a bear call spread using
in the money options. With QQQ trading at $28.60 you might buy ten $30 Calls and
sell ten $27.50 Calls.
You
would buy the $30 Calls for $.95 and sell the $27.50 Calls for $1.55. You would
have a credit of $600 ($1550 - $950) after setting this spread up, which is also
your maximum profit. If the stock moves lower the calls will expire worthless
and you will keep the $600 premium.
Using
ShareCharts Option Strategies for Bear Call Spreads the entire transaction can
be seen clearly. Go to Derivatives < Option Strategies and select Bear Call
Spread from the ‘Strategy’ Drop Down Box. Enter in all relevant parameters
and click ‘Update’ to view the chart.