3.3Profit Strategy for Small Fluctuations - Practical Application of Vertical Spread Strategy

Hello

Today, let's talk about the second sub-strategy of the vertical spread strategy: Bearish Call Spread Strategy.

1.3 Bearish Call Spread Strategy

The Bearish Call Spread strategy involves buying a call option with a higher strike price while simultaneously selling a call option with a lower strike price to generate a net premium income. This strategy is suitable when you anticipate a slight decrease in the stock price in the future and want to limit the maximum potential loss in case of price increases. If the stock price aligns with expectations, the call option with the lower strike price is unlikely to be exercised, and the call option with the higher strike price is likely to be exercised.

For example, let's consider AMD with a current stock price of $105. Suppose we expect its stock price to decline to $102 in the future. In this scenario, we can first buy a call option with a strike price of $105, incurring a premium cost of $2.22. At the same time, we sell a call option with a strike price of $101, receiving a premium income of $5.11. The net premium income from this strategy would be $2.89.

If the future stock price rises to $105 or higher, the call option with a strike price of $101 would be exercised, resulting in a profit of $1.11 ($101-$105 +$5.11). For the part of the stock price above $105, combined with the call option with a $105 strike price and the premium cost of $2.22, the total loss would be $1.11

If the future stock price decreases to $101 or lower, neither call option would be exercised, and the strategy would achieve its maximum income of $2.89.

In other words, if the stock price falls between $101 and $105, the strategy's profit would range from -$1.11to $2.89.

How to Implement the Bearish Call Spread Strategy Using an App?

In practice, you can directly match this strategy using an app and calculate the combined profit data through the app. How do you do it?

Continuing from the previous example, click on the strategy section below and select the Vertical Spread Strategy. Modify the default spread to 4 (the spread between the two options, $105 and $101, is 4). This will display all the option portfolios with a spread of 4. You can select the desired call option portfolio. However, remember to change "Buy Call" to "Sell Call." After clicking, the app will automatically calculate the portfolio's maximum profit, maximum loss, and profit-loss curve data (considering contract units, all data in practical execution is theoretically multiplied by 100, and it includes transaction costs like fees, so there might be some deviation).