Bear Call Credit Spread (BCCS)
1. Bear -> Bearish Outlook
2. Call -> Call Options
3. Credit -> Receive premium
4. Spread -> Consist of 1 Long and 1 Short position
What does this mean if we were to deploy this strategy? It means we expect the stock price to go down or flat. We construct this strategy using two Call Options, one long (buy to open) position and one short (sell to open) position and we will receive premium.
Let's see the example below:-
This is Apple stock and it is trading at $110.49 (See 1). As we expect the stock price to go down or flat, we can construct BCCS using two Call Options. In this example, we select 115 strike and 120 strike (See 3).
1. We will buy to open 120 strike at $1.87 (mid of $1.85~$1.89) and;
2. We will sell to open 115 strike at $3.42 (mid of $3.40~$3.45) (See 2).
3. We need to open this two position together
We will receive a premium of $1.55 ($3.42 - $1.87) from this spread trade. The strike wide is $5 (120 strike - 115 strike).
With this strategy, as long as the Apple stock does not go above $115, we will take $1.55 as our profit ($155 profit for every options spread we create as 1 lot = 100units) upon options maturity. As the stock is currently traded at $110.49, there is $4.51 'buffer/cushion' before we take action to repair. If we do nothing and the stock price increase to $130, the maximum lose incurred would be $3.45 ($5 strike wide - $1.55 premium receive). The maximum lose would still be $3.45 ($345 loses for every options spread we create as 1 lot = 100units) even if the stock price shoots up to $200 or $300 upon options maturity.
When we construct Bear Call Credit Spread and Bull Put Credit Spread, we limit our losses (in this example $345 per options lot). If we choose not to take action against this defined risk trades, meaning, we create this options strategy trades, forget about it and only check again after the options matured, the maximum losses that we could incur will not exceed $345. This type of trades can bring peace of mind especially to those traders that do not/unable to monitor the market whole day.