Bear Call Spread in AAPL

One of the nice things about a credit spread is it can profit if the underlying doesn't move much or moves in the intended direction. A debit spread, such as a bear put spread, often needs the underlying to fall in order to profit.
A bear call spread involves selling a call option while purchasing a higher strike call option with the same expiration. The short call option is more expensive than the long call option, which creates a credit spread and protects the position from further losses if the underlying rallies. 

Here is a recent example we looked at in class. Apple Inc. (AAPL) was trading at around $150 earlier this month. After moving lower in December, the stock was starting to move higher again. In addition, the $155 level provided some potential resistance. A trader might assess that this resistance could be a difficult area for the stock to rise above even with this recent move lower. He or she could, thus, try to capitalize from this forecast by trading a bear call spread.
Here the trader could sell a call right around potential resistance at $155 and buy a higher-strike call for protection, thus creating the spread. 

In the above example, we modeled out a 155/157.5 call spread with about 3 days to go to expiration. We sold the January-11 155 call for a credit of 1.60 and bought the January-11 call for a debit of 1.10. The total credit on the spread was 0.50. If AAPL finished at or under $155 by expiration, the spread would expire worthless and the trader would keep the credit. The maximum at risk on this trade idea was the difference in the strike prices minus the credit received, which in this case is 2.00 (2.50 – 0.50). The breakeven point was $155.50 (155 + 0.50), which is derived from adding the credit to the short call. As the odds would have it, AAPL closed just over $152 and the spread expired worthless and at maximum profit.

A bear call spread can be another effective tool in your options trading box. Just consider using support, or in the case above resistance, when implementing the spread.

John Kmiecik, Market Taker Mentoring

Trader Education