A bear call spread is a type of vertical spread, meaning that two options within the same expiry month are being traded. One call option is being sold, which generates a credit for the trader. Another call option is bought to provide protection against an adverse move. The sold call is always closer to the stock price than the bought call. As the name suggests, this trade does best when the stock declines after the trade is open. However, there can be many cases where this trade can make a profit if the stock stays flat and even if it rises slightly. We’ll look at lots of examples later in this post, including how to manage the trade when it goes against you. Bear call spreads are risk defined trades, there are no naked options here, so they can be traded in retirement accounts such as an IRA. Traders should have a bearish outlook on the stock and ideally look to enter when the stock has a high implied volatility rank.

Let’s take a look at Barchart’s Bear Call Spread Screener for November 16th:

As you can see, the scanner shows some interesting Bear Call Spread trades on stocks such as MSFT, INTC, AAPL, T, KO and PYPL. 

Below are the full parameters for this scan:

• Dayes to expiration: 0 to 60 days
• Security Type: Stock
• Volume Leg 1: 100
• Open Interest Leg 1: 500
• Moneyness Leg 1: -5.00% ot 5.00%
• Probability: Above 25%
• Volume Leg 2: 100
• Open Interest Leg 2: 500
• Ask Price Leg 2: Greater than 0.05

Let’s take a look at the first line item – a MSFT Bear Call Spread

Using the December 17 expiry, the trade would involve selling the 320 call and buying the 330 call. That spread could be sold for around $7.20 which means the trader would receive $720 into their account. The maximum risk is $280 for a total profit potential of 257.14% with a probability of 25.90%. The breakeven price is 327.20. This can be calculated by taking the short call strikes and adding the premium received. As the spreads is $10 wide, the maximum risk in the trade is 10 – 7.20 x 100 = $280. Therefore, if we take the premium ($720) divided by the maximum risk ($280), we see that this Bear Call Spread trade has the potential to return 257.14%. MSFT has a strong day yesterday, closing 2.11% higher on the day.

The Barchart Technical Opinion rating is a 100% Buy with a strengthening short term outlook on maintaining the current direction. Given the strong rating, let’s add a filter to only return stocks with a Sell or Hold rating.

This gives us these results:

Let’s analyze the first result.

This Bear Call Spread on INTC involves selling the 47.50 December put and buying the 49.50 put. That spread could be sold for around $1.39 which means the trader would receive $139 into their account. The maximum risk is $60 for a total profit potential of 227.87% with a probability of 37.70%. The breakeven price is 48.89.  INTC is rated a Strong Sell and the Barchart Technical Opinion rating is a 100% Sell with a Average short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.

INTC is showing an IV Percentile of 33% and an IV Rank of 20.94%. The current level of implied volatility is 25.62% compared to a 52-week high of 45% and a low of 20%.

Mitigating Risk

Thankfully, Bear Call Spreads are risk defined trades, so they have some build in risk management. The most the INTC example can lose is $60. Position sizing is important so that a 100% loss does not cause more than a 1-2% loss in total portfolio value. Bear Call Spreads can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and it’s getting close to expiry.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, Nov 29, 2021.