Bear call spread
A bear call spread is a bearish strategy that works in a downtrending market and provides profits when the price of the underlying stock goes down. The key word in the title gives away the direction of the strategy (it is bearish) and the strategy (selling a call) to enter a credit spread. When entering a bear call spread, you are in a bearish position.
There are several advantages to creating a bear call spread in a down market, because a trader is profitable whether the stock goes down, stays the same or goes up slightly. This makes it a low-risk strategy and reduces the chances that your account could really take a big hit. If you have indications that a stock will be headed south, the bear call spread is a simple low-risk, limited-reward strategy that is simple to create and easy to manage.
Since you are looking for a stock that is bearish, it might be best to seek out a stock that is at a resistance level and headed down. (Remember, you want to stock to be moving down because that will secure your profit and make the trade much simpler.) To create the bear call spread you then sell the call option at the first price above the resistance level, which is slightly out of the money. The second step is to buy the call option at the next strike price above that, a little farther out of the money. You enter both positions at the same time; most online brokerage houses permit this on their trading platform, which makes the process easier.
The drawback on the strategy is that it limits your potential gains (although it also limits your potential losses) and prevents you from making big money if the stock really falls. Remember, you've already made your money up front and can't pull more from this strategy, regardless of how bearish the stock actually becomes.
A similar strategy is the bear put spread, when a trader will buy a put at a higher strike price and sell a put at a lower strike price. This is also a low-risk bearish strategy with a limited reward that works just like a bear call spread. But the bear put spread is a debit spread, which means it costs you money to enter the trade and requires four commissions to get the most profit from the deal. Most traders believe it makes more fiscal sense to stick with a bear call spread.
