Bear Call Spread
The bear call credit spread is a bearish strategy with low risk and limited reward.
How it works: The investor is in a bearish position. Look for a stock that is at resistance and headed down.
You then A) sell a call option at the first strike price above resistance and B) buy a call option at the next
strike price above that.
Example: You are bearish about a stock trading at $48. To enter the bear call spread, you A) sell the $50 call
for $5, and B) buy the $55 call for $2. Based on one contract, selling the call would bring in $500 in premium
and buying the $55 call would cost $200. In this case, if the stock stayed in the same place or fell in value,
your maximum profit would be $300.
If the stock price rises, your maximum loss would be $200. The $300 credit you received would offset the $500 loss
(the different between the $55 and $50 strike prices) and limit your loss to $200.
The payoff: You are profitable if the stock goes down, stays at the same price, or goes up slightly.
The drawback: Even if the stock falls through the floor, your profit is capped.
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