Call Credit Spread Stratergy

The call credit spread is a bearish options trading strategy with pre-defined maximum loss . It is comprised of a short call and a long call, and is sometimes also referred to as a “bear call spread” or “short call spread”

Trade

-Sell 1 call
-Buy 1 call at any price higher than short call

Trade Example

Stock XYZ is trading at $27 a share.
– Sell 28 call for $1.12
– Buy 30 call for $0.54
– The net credit received for this trade is $0.58

Width of Spread : $30-$28 = $2

Profit & Loss Diagram

Call Credit Spread Summary

Break Even PriceStrike price of short leg + Premium
Maximum ProfitLimited
Maximum Profit ScenarioStock is at or lower than the strike price of the short call leg
Maximum LossLimited : Width of spread – Initial Premium
Maximum Loss ScenarioStock is higher than the strike price of long call leg
Why TradeIt caps the maximum loss
It uses less buying power as compared to short call
When to OpenStock Outlook : Neutral to moderately bearish
Volatility : High so you can get higher net credit
When to CloseWhen the trade is making 50% of the max profit potential
Legs2 legs
Passage of timePositive impact on trade.
With passage of time, the value of this option decreases but at lesser rate when compared to just short call
Increase in volatilityNegative impact on trade.
With increase in volatility, the value of option increases
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