Bracket Trading Techniques

Bear Call Spreads (Credit Spreads)
For investors who are generally bearish about a stock an are looking for a low risk strategy that has a net credit.

Example	Increase in Volatility	Time Erosion
sell call (lower strike) buy call (higher strike)	Increase in implied volatility hurts position unless stock price decreases at the same time.	helps position

When your feeling on a stock is generally negative, Bear Call Spreads are nice low risk, limited reward strategy. To create a Bear Call Spread you will use call options at or near the current market price of the stock.

Like bear put spreads, bear call spreads profit when the price of the underlying stock decreases. Selling slightly out-of-the-money calls and then buying a little further out-of-the-money calls are typically the way bear call spreads are constructed.

With the underlying stock trading near $50, you'd sell the 50 calls for $5 and buy the 55 calls for $2. This way, you'd initiate the spread for a credit of $300, your maximum profit. If you are correct and the stock moves lower, both calls will expire worthless and you'll keep the $300 premium you collected when you initiated the position.

Stock: $50
Sell one 50 call @ 5	$500
Buy 1 55 call @ 2	($200)

Net Credit	$300

Maximum Profit	$300
Maximum Loss	$200

Now, let's image the stock moves unexpectedly higher to $70. To close the position at that price, you would have to buy the 50 calls for $20 and sell the 55 calls for $15. With the underlying stock at or above 55, the will bring about the maximum loss of $200 ($500 - $300 credit received when the position was opened).

The ROI for this position is calculated using the $200 maximum possible loss for the spread, not including the initial credit, because this is the amount of money that must remain available in the account until either expiration or a closing trade, whichever comes first.