CURRENT TRENDS

“BEAR CALL SPREAD” STRATEGY

Thursday, September 21, 2006, 9:35 AM ET

Strategy in brief: Call option is bought with a higher strike and another call sold with a lower strike, thus producing a net credit.
When to use this strategy: you think the stock will go somewhat down or at least is a bit more likely to fall than to rise.
Comments:
• Good position if you want to be in the stock but are unsure of bearish expectations.

Strategy in brief: Call option is bought with a higher strike and another call sold with a lower strike, thus producing a net credit. When to use this strategy: you think the stock will go somewhat down or at least is a bit more likely to fall than to rise. Comments: ·          Good position if you want to be in the stock but are unsure of bearish expectations.   Figure: Bear Call Spread Strategy Example   Profit: limited, reaching its maximum if the stock ends at or below the lower strike at expiration; equal to the net initial credit. At expiration, the break-even point will be lower strike plus initial credit. Loss: reaches its maximum if the stock at expiration is at or above a higher strike. It is equal to the difference between strikes minus initial credit. Risk: limited. Reward: limited. Time decay: if the stock is midway between the strikes, there is no time effect. At a higher strike, profits increase at the fastest rate with time. At lower strike, losses increase at a maximum rate with time. Research Findings and Trading Tips: 1. The more bearish you are, the lower strikes you should select. It gives you more credit and requires more substantial stock price downward movement to realize the profit potential. 2. This strategy doesn’t require any investment because this is a credit spread. It only reduces the buying power of trader’s margin account.     © "Worry-free Option Trading System"  &  Stock Markets Institute, 2002