A Credit Call Spread involves selling a call and buying a call with a higher strike price within the same expiration month.
• Cost Basis Reduction: Bearish Call Spreads also allow Cost Basis Reduction.
• Moderate Downward Movement: It is executed when the general feeling towards an asset is negative and a moderate downward movement is expected.
• Low Risk, Low Reward and Lower Requirements: Credit Call Spread involves low Risk, has low Requirements and will provide low Reward.
• Exchanging Downside Premium for Chance to Recover Premium: The higher Probability of Success compared to Long Puts is the most important aspect of Credit Call Spread.
If you have a bullish bias, you may be able to buy a Put, but by executing Credit Call Spreads, you can also reduce your cost basis and thus improve the Probability of Success.
• Sell In-The-Money (ITM) Call Option with a lower Strike Price.
• Buy Out-of-The-Money (OTM) Call Option with higher Strike Price.
• Use the same underlying asset and the same contract Expiration Date based on forecast & analytics accuracy.
• Select Strike Prices based on Probability of Success, and Tradespoon’s analytics.
In Figure 15, x-axis denotes the stock price and y-axis denotes the Profit/Loss. Point B denotes the buying price and Point A denotes the selling price, which are the Strike Price selections. The Expiration Month is again 50-75 days. So, Maximum Loss will occur at Point B, meaning that if you are wrong and the stock sells off lower than point A, you will lose money. Maximum Gain will occur at Point A. The break-even point is between Point A and B where blue line intercepts the x-axis. This example is of a directional trade with bearish bias.
Return on Capital
• With Bear Call Spreads you pay the cost of the Long Call (Out-of-The-Money Option) and you earn proceeds from the sale of Short Call Option (In-The-Money Option).
• Total trading costs is the difference between the Strike Prices and the original amount earned at maximum Risk.
• Maximum Gain is limited to the original proceeds.
• Maximum Loss is the difference between the two Strike Prices minus the original Credit you receive.
• Break-even Point is the middle point between the two Strike Prices where the blue line intercepts the x-axis.