US stock markets tumbled today primarily driven by concerns over a new AI model from China's DeepSeek, which poses a competitive threat to U.S. tech companies.
One way to use options to profit from declining stock prices is via a bear call spread.
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.
Let’s take a look at Barchart’s Bear Call Spread Screener for January 28th:
As you can see, the screener shows some interesting Bear Call Spread trades on stocks such as ABNB, AMAT, PEP, CMG, GIS, ABBV, BUD and UBER.
Below are the full parameters for this scan:
- Opinion Rating: Sell greater than 1%
- Days to expiration: 15 to 60 days
- Monthly Expirations
- Security Type: Stock
- Volume Leg 1: 100
- Open Interest Leg 1: 500
- Moneyness Leg 1: -10.00% to 0.00%
- Breakeven Probability: Above 25%
- Volume Leg 2: 100
- Open Interest Leg 2: 500
- Ask Price Leg 2: Greater than 0.20
Let’s look at the first line item – a Bear Call Spread on ABNB stock.
Using the March 21 expiry, the trade would involve selling the $130 call and buying the $135 call.
That spread could be sold for around $2.05 which means the trader would receive $205 into their account. The maximum risk is $295 for a total profit potential of 69.49% with a profit probability of 55.8%.
The breakeven price is $132.05. This can be calculated by taking the short call strike and adding the premium received.
As the spread is $5 wide, the maximum risk in the trade is 5 – 2.05 x 100 = $295.
The Barchart Technical Opinion rating is a 56% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Let’s analyze another trade – a Bear Call Spread on Applied Materials.
This Bear Call Spread on AMAT stock involves selling the $175-strike January call and buying the $180-strike call.
That spread could be sold for around $2.00 which means the trader would receive $200 into their account. The maximum risk is $300 for a total profit potential of 66.67% with a profit probability of 53.3%.
The breakeven price is $177.
The Barchart Technical Opinion rating is a 56% Sell with a Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Mitigating Risk
Thankfully, Bear Call Spreads are risk defined trades, so they have some build in risk management. The most the ABNB example can lose is $295 and the maximum loss on the AMAT trade is $300.
Position sizing is important so that a 100% loss does not cause more than a 1-2% loss in total portfolio value.
Bear Call Spreads can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and it’s getting close to expiry.
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.
