IB/MIB Application

Bear Call Credit Spreads And Straddles

This piece will look at two different strategies you can use to trade different market conditions. The first strategy, the bear call credit spread, will be suited to highly volatile market situations. The second strategy the straddle is suited to markets where there is low volatility. If you master both of these strategies you will be able to trade the market no matter what conditions you find yourself in.

If the market that you are trading in is particularly volatile you might want to take a look at the bear call credit spread. A bear call credit spread is an options trading strategy which is used when you believe that asset which the option derives its value from will decline. It involves selling a call option at a specific strike price while also buying calls at a higher price. Both options should be set to expire in the same month. The effect of the spread is to create a credit. As mentioned earlier this option strategy is best applied when there are between 30 to 45 days to expiration

This bear call credit spread has a limited risk and also a limited reward. The maximum profit potential of this trade is the credit that is created by the spread. So you go into the trade knowing how much money you can possibly make. Also the maximum risk of the of the trade is the difference between the strike prices minus the initial credit multiplied by one hundred. Your break even point for this trade is the short strike price plus the credit. The main advantage of putting a bear call credit spread into play is that takes your risk from unlimited to limited. The flip side of this however is that the potential reward of the trade is also reduced.

profit bear spreads

A straddle is used when there is low volatility and you expect that asset from which the option is derived to increase in value. The Straddle combines a long call with a long put with the same strike price and the same expiration. In this trade you will be going long two options. As such you want to exit the position within 30 to 45 days of the options expiring. This will help to avoid the risk of time decay.

This strategy combines limited risk with high to unlimited reward. The maximum reward for this trade on the upside is unlimited. On the downside the maximum risk is the strike price minus the net debit multiplied by one hundred. The break even point on the trade is the strike price plus the net options prices . The second break even point is the strike price minus the net options price. Overall the advantages of this trade is that it reduces the directional risk of a single option position. The disadvantage is that is more expensive than a single option position.

options payoff diagram

Both the Straddle and the Bear Call Credit Spread have limited risk, which makes them an ideal strategy for traders who wish to protect their downside exposure. By learning how to use both options strategies you will be able to trade both high and low volatility options and can profit whether you think the underlying asset is going to fall or rise.