When the market is volatile and you are moderately bearish on it, you might consider a Bear Call Spread. This strategy involves selling a call option at one strike price and buying a call on the same asset at a higher strike price (further out-of-the-money). Usually both options will have the same expiration date. This is also referred to as a Bearish Credit Spread
.
This strategy has a profit/loss picture that is similar to a Bear Put Spread, however in this case, there is a net premium that goes into your trading account when you establish the position, whereas with the Bear Put Spread, you are paying out a premium when you establish the position. Like the Bear Put Spread, this strategy has limited risk but also limited profits.
This strategy is a bearish strategy
, like selling naked calls, that places premium into your account when you establish the position. However it limits your risk by the purchase of lower priced calls, protecting you if the price goes up significantly.
With this strategy, your potential profit is limited to the premium you collected for the calls you sold less commissions and the premium you paid for the calls you bought. Your potential losses are limited to the difference between the strike prices multiplied by 100 times the point value of the contract, less the cost of establishing the position. An option calculator such as Option-Aid performs these calculations for you instantaneously.
When we initiate a Bear Call Spread, the call we buy has the same expiration date, with a higher strike price (at a price point that we feel sufficiently limits our risk, without significantly lowering the premium we are collecting.
It is also important to cover risks and caveats of this strategy.
The risk of this position is limited and known risk
as described above. Remember that the commission you pay for this position will be higher than the commission for a straight option play, because you are initiating two related option transactions.
When you initiate a Bear Call Spread, you are limiting your upside potential. If the asset price drops significantly, then you aren't able to fully participate in that gain like you would if you had purchased a put.
It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.
