Bearish Outlook? Try These 2 Bear Call Spread Trades on Thursday

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.

Unitedhealth Group (UNH) has been in a downtrend for a few months and is rated an 88% 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 500.

UnitedHealth Group, Inc. provides a wide range of health care products and services, such as health maintenance organizations, point of service plans, preferred provider organizations and managed fee-for-service programs. 

UnitedHealth has the most diverse membership base within the managed-care organization market, which gives it significant competitive advantages. 

The company has acquired a number of competing healthcare which transformed it from a pure health insurer to a comprehensive healthcare provider. UnitedHealth reports through two segments: UnitedHealthcare and Optum. UnitedHealthcareis divided into UnitedHealthcare Employer & Individual; UnitedHealthcare Medicare & Retirement; UnitedHealthcare Community & State and UnitedHealthcare Global; providing health care benefits globally. 

Optum is a technology-enabled health services business serving the broad health care marketplace, including those who need care. The segment is divided into OptumHealth, OptumInsight, OptumRx and Optum eliminations.

UNH is currently below declining 50 and 200-day moving averages and could be a good candidate for a bearish option trade.

Implied volatility is moderate at around 26%. The twelve-month low for implied volatility is 20% and the twelve month high is 34%. The IV Percentile is 59%.

Let’s look at how a bear call spread trade might be set up on UNH stock.

UNH Bear Call Spread: April 510 – 515 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 April expiry 510 strike call and buying the 515 strike call.

Selling this spread results in a credit of around $0.80 or $80 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 – 0.80 x 100 = $420.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 19.05%.

The spread will achieve the maximum profit if UNH closes below 510 on April 21, in which case the entire spread would expire worthless allowing the premium seller to keep the $80 option premium.

The maximum loss will occur if UNH closes above 515 on April 21, which would see the premium seller lose $420 on the trade. 

The breakeven point for the bear call Spread is 510.80 which is calculated as 510 plus the $0.80 option premium per contract.

Let’s look at another idea, this time on Union Pacific Corp (UNP) which was another stock that came up on my bearish scans.

UNP Bear Call Spread: April 200 – 205 Bear Call Spread

This bear call spread trade also involves using the April expiration on UNP and selling the 200-205 call spread.

Selling this spread results in a credit of around $0.80 or $080 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 – 0.80 x 100 = $420.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 19.05%. 

The spread will achieve the maximum profit if UNP closes below 200 on April 21, in which case the entire spread would expire worthless allowing the premium seller to keep the $80 option premium.

The maximum loss will occur if UNP closes above 205 on April 21, which would see the premium seller lose $420 on the trade. 

The breakeven point for the Bear call Spread is 200.80 which is calculated as 200 plus the $0.80 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 UNH bear call spread, I would set a stop loss if the stock traded above 500. 

For the UNP trade, I would close for a loss if the stock broke through 195.

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.

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