← IntermediateLesson 15 · 5:06
Bear call credit spread
Summary
You can build a bear call credit spread by selling a lower-strike call and buying a higher one, so you are paid up front for expecting XYZ not to rise. You can state what you collect, the bigger amount you can lose, where you break even and how time works for you, and you can place all four vertical spreads side by side.
Key terms
- bear call credit spread
- Sell a lower-strike call and buy a higher-strike call with the same expiry, collecting cash, to profit if the stock does not rise.
- credit spread
- A spread that pays you to open it.
- margin
- Money your broker holds against what a sold position could lose.
- assignment
- When a buyer exercises and you, as the seller of that option, must deliver.
Check yourself
Answer each question to see why the right answer is right.
1. You sell the XYZ $100 call for $3.45 and buy the $105 call for $1.58. Where do you break even on the last day?
2. XYZ rises to $110 by the last day. What is your result?
3. Why buy the $105 call instead of selling the $100 call on its own, with no shares behind it?
4. Let the days pass. At $105, what does time do to this spread?
5. In the family of four vertical spreads, which describes the bear call spread?
Finished the video and the quiz? .