As you can see, the screener shows some interesting Bear Call Spread trades on stocks such as COST, META, NVDA, TMUS, INTC, AMGN, X and AMZN.
Below are the full parameters for this scan:
Days to expiration: 15 to 60 days
Monthly Expirations
Security Type: Stock
Volume Leg 1: 100
Open Interest Leg 1: 500
Moneyness Leg 1: -10.00% to 0.00%
Breakeven Probability: Above 25%
Volume Leg 2: 100
Open Interest Leg 2: 500
Ask Price Leg 2: Greater than 0.05
Let’s look at the fourth line item – a Bear Call Spread on Nvidia stock.
Using the November 17 expiry, the trade would involve selling the $425 call and buying the $435 call.
That spread could be sold for around $4.35 which means the trader would receive $435 into their account. The maximum risk is $565 for a total profit potential of 85.19% with a probability of 55.7%.
The breakeven price is $429.35. This can be calculated by taking the short call strike and adding the premium received.
As the spread is $10 wide, the maximum risk in the trade is 10 – 4.35 x 100 = $565.
The Barchart Technical Opinion rating is a 24% Buy with a weakest short term outlook on maintaining the current direction.
Let’s strengthen the screener by adding only stock with an 80% or greater Sell Rating.
This gives us these results:
Let’s analyze the first result – a Bear Call Spread on Freeport McMoran (FCX).
This Bear Call Spread on FCX stock involves selling the $36-strike November call and buying the $37-strike call.
That spread could be sold for around $0.40 which means the trader would receive $40 into their account. The maximum risk is $0.60 for a total profit potential of 66.67% with a probability of 57.5%.
The breakeven price is $36.40.
The Barchart Technical Opinion rating is a 100% Sell with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
FCX is showing an IV Percentile of 51% and an IV Rank of 28.34%.
Mitigating Risk
Thankfully, Bear Call Spreads are risk defined trades, so they have some build in risk management. The most the FCX 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.
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. For more information please view the Barchart Disclosure Policy here.
Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.