Feeling down about this bear market?
Don't worry, there's still a way to profit! In this article, we'll show you two bear call spread trades you can make this Thursday.
These strategies are designed to help you navigate the downturn and come out ahead.
A bear call spread is a type of vertical spread, meaning that two options within the same expiry month are being traded.
One call option is being sold, which generates a credit for the trader. Another call option is bought to provide protection against an adverse move.
The sold call is always closer to the stock price than the bought call.
As the name suggests, this trade does best when the stock declines after the trade is open.
However, there can be many cases where this trade can make a profit if the stock stays flat and even if it rises slightly.
Bear call spreads are risk defined trades. There are no naked options here, so they can be traded in retirement accounts such as an IRA.
Traders should have a bearish outlook on the stock and ideally look to enter when the stock has a high implied volatility rank.
Two stocks came up on my screens today as possible bear call spread candidates.
Coinbase (COIN) dropped nearly 8% yesterday and crossed below the all-important 200-day moving average.
COIN stock is rated a 40% Sell with a strengthening short term outlook on maintaining the current direction.
Looking at the chart there are plenty of areas of potential resistance around 200.
Coinbase is the largest U.S. cryptocurrency exchange, trading some 50 different digital assets.
Implied volatility is high at around 71%.
The twelve-month low for implied volatility is 59.70% and the twelve month high is 104%. The IV Percentile is 71%.
Let’s look at how a bear call spread trade might be set up on Coinbase stock.
COIN Bear Call Spread: Sept $240 – $250 Bear Call Spread
As a reminder, A bear call spread is a defined risk option strategy that profits if the stock closes below the short strike at expiry.
To execute a bear call spread an investor would sell an out-of-the-money call and then buy a further out-of-the-money call.
This bear call spread trade was found using the bear call spread screener and involves selling the September expiry $240 strike call and buying the $250 strike call.
Selling this spread results in a credit of around $0.75 or $75 per contract. That is also the maximum possible gain on the trade. The maximum potential loss can be calculated by taking the spread width, less the premium received and multiplying by 100. That give us:
10 – 0.75 x 100 = $925.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 8.1%.
The spread will achieve the maximum profit if COIN closes below $240 on September 20, in which case the entire spread would expire worthless allowing the premium seller to keep the $75 option premium.
The maximum loss will occur if COIN closes above $250 on September 20, which would see the premium seller lose $925 on the trade.
The breakeven point for the bear call Spread is $240.75 which is calculated as $240 plus the $0.75 option premium per contract.
Let’s look at another idea, this time on Marvell Technologies (MRVL) which was another stock that came up on my bearish scans.
MRVL Bear Call Spread: September $70 – $75 Bear Call Spread
This bear call spread trade also involves using the September expiration on MRVL and selling the 70-75 call spread.
Selling this spread results in a credit of around $0.45 or $45 per contract. That is also the maximum possible gain on the trade. The maximum potential loss can be calculated by taking the spread width, less the premium received and multiplying by 100. That give us:
5 – 0.45 x 100 = $455.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 9.89%.
The spread will achieve the maximum profit if MRVL closes below $70 on September 20, in which case the entire spread would expire worthless allowing the premium seller to keep the $45 option premium.
The maximum loss will occur if MRVL closes above $75 on September 20, which would see the premium seller lose $455 on the trade.
The breakeven point for the Bear call Spread is $70.45 which is calculated as $70 plus the $0.45 option premium per contract.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
For the COIN bear call spread, I would set a stop loss if the stock traded above $220.
For the MRVL trade, I would close for a loss if the stock broke through $65.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
