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”
-Sell 1 call
-Buy 1 call at any price higher than short call
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 Price||Strike price of short leg + Premium|
|Maximum Profit Scenario||Stock is at or lower than the strike price of the short call leg|
|Maximum Loss||Limited : Width of spread – Initial Premium|
|Maximum Loss Scenario||Stock is higher than the strike price of long call leg|
|Why Trade||It caps the maximum loss
It uses less buying power as compared to short call
|When to Open||Stock Outlook : Neutral to moderately bearish
Volatility : High so you can get higher net credit
|When to Close||When the trade is making 50% of the max profit potential|
|Passage of time||Positive 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 volatility||Negative impact on trade.
With increase in volatility, the value of option increases