What is a BEAR CALL?
If you deem a stock/indices/ETF to either to decline, you have three options to play with:
- SHORT IT
- BUYS PUTS
- DO A BEAR CALL SPREAD
In SHORTING, you not only require serious capital, but you run the risk of the trade not working out and being “squeezed” (BYND recently, TLRY summer 2018, BA start of 2019). Your reward however is virtually limitless (assuming the stock/indices/ETF retraces to $0)
In BUYING PUTS, you don’t need much capital at all, but you have the obvious risk of requiring the stock/indices/ETF to drop to/towards your strike as quickly as possible prior to your expiration in order for it to be a profitable outcome. Again, your reward is virtually limitless (assuming the stock/indices/ETF retraces to $0)
In doing BEAR CALL SPREADS, you are at a greater advantage in that you are simply projecting how high the stock/indices/ETF CAN NOT get up to prior to the expiration date of the options chosen. Your reward however is CAPPED at slightly less than 💯since you a) need to buy the SHORT CALL back prior to expiration (best possible price is < 0.10) and have the cost of the LONG CALL purchased (more on this below).
CURRENT OVERBOUGHT LISTING (a/o AUG 21 2020)
Example: My JUL 26 2019 AMZN EARNINGS BEAR CALL TRADE
AMZN is one of the stocks we’ve covered since the inception of 32Trades and a big favorite of many members due to the large moves it can often make. With earnings season, trying to play a straight CALL or PUT most often winds up in a poor choice, thus the BEAR CALLS SPREAD weapon is better deployed for this reason.
My choice was to take the 2075 SHORT CALL whereas the premium collected was 7.73 with 2350 the LONG CALL to balance the spread which were 0.04. Thus my NET CREDIT (amount collected) was 7.73 – 0.04: 7.69 or $769 per contract. All that was required now was for AMZN to close below 2075 Friday so I could cover the SHORT CALL cheap (which I was able to cover early Friday @ 0.06).
Many would choose a more protective form of a BEAR CALL SPREADS whereby if the SHORT CALL is 2075 @ 7.73, they may decide to chose 2100 for the LONG CALL which were 4.80 at the time of my entry. Same scenario follows whereas the NET CREDIT would have been 7.73 – 4.80: 2.93 or $293 per contract and with the covering of the SHORT CALL under 0.10 after earnings, the total GAIN is simply lower: 2.83 versus 7.63
MY version of an extreme LONG CALL that has virtually no chance whatsoever of being in play prior to the expiration is simply that a BEAR CALL SPREAD is a cheaper version of a SHORT and a limited profit version of a PUT without the requirement of the stock/indices/ETF (in this case AMZN) going down: it just can’t go up to/through my SHORT CALL strike.
How To Do It
To do a bear call spread, you would first need to contact your trading platform provider and have the appropriate level to conduct these types of trades. Typically, margin requirements are lower for indices/ETFs compared to individual stocks. Then all you are looking to do is:
- SELL A CALL with a strike price at/above the current market price.
- BUY A CALL with a higher strike price.
The CALL YOU SELL is to take in income: by selling a call with a strike price at/above the current market price, the idea is there is no way the price is going to go up there prior to your expiration date and wind up expiring worthless which is what you truly hope for so that you are covering by buying this back as lows as 0.01 so you keep all the premium (income) you already collected.
The CALL YOU BUY is because you must have a balance so you have to decide if you want to be protected against the strike you sold coming into play (stock is @ 100; you sold 110 calls and stock spiked to 111). This side of the trade is where you reduce your income (net credit) as it is set up in the real world where 10% is a MASSIVE GAIN from significant potential losses if the stock rises well above the target price prior to entering the trade.
The RISKS Involved With BEAR CALLS
This sounds easy, but it does not come without risks.
Obviously, should the stock/indices/ETF you’ve chosen rise above the SHORT CALL you have sold, you run the risk of needing to cover that trade (which is where the LONG CALL strike decision comes into play). For those with the ability to absorb potential heat, there is always the option of rolling the trade to a further date which will thus keep you involved in it until that date and thus tie up the capital requirements until the trade is closed. Thus entry is important to consider.
The other risk, one which is sometimes unknown, is the risk of being assigned as options can be exercised on any business day, and holders of a SHORT CALL position have no control over when they will be required to fulfill the obligation. If assigned, you would essentially be SHORT -100 shares for every contract your holding from that assignment spot. Thus, the risk of early assignment is a real risk that must be considered when entering into positions involving short options.
While it is rare as it usually occurs on the day before dividends, it is more a risk for In The Money SHORT CALLS than those like the AMZN 2075 CALLS in the example above.
If early assignment of a SHORT CALL does happen, you MUST DELIVER and it can be via either buying stock in the open market or by exercising the LONG CALL.
How To Deploy BEAR CALLS Into Your Strategies
If you like watching a pot of water as it attempts to boil or eating strictly out of a microwave (meaning you have to constantly being pushing buttons to call yourself a trader), then this is not for you. The AMZN earnings example above is about as microwaveable as you can get with it being overnight unless you choose to do these on expiration days (and even then its usually going to be a few hours to collect properly).
Due to the mathematical process of premium v. time v. stock price, deploying BEAR CALLS into your trading is best done by committing to that time frame where the expiration dates are. So if you were say working all week and don’t have time to trade, you may do a weekly BEAR CALLS spread on a stock/indices/ETF so it involves much less monitoring during your schedule and can be closed out at the end of the Friday trading session via a quick 2-3 minute log in and close (or just set a GTC BUY ORDER after entering it).
If you were going to be, say on vacation and wanted to collect some premium, same application but with a larger window for both strike deciding with much more premium involved for collecting.
Example: It’s JUL 27, 2019 and you are going on a 1-month holiday to Spain.
You might decide to SELL AUG 30 SPX 3100 CALLS for 6.50 and BUY AUG 30 SPX 3300 CALLS for 0.15 for a NET CREDIT of 6.50 – 0.15: $635 per contract.
Assuming you never check in during your vacation and SPX never once broke above 3100 during your vacation, when you return and check in AUG 30, you will be looking to close them under 0.10 for a total net credit after covering of 6.25 per contract or $625/per.