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

With the market starting to show a few cracks, it’s a great time to look at some bearish options trades.

In this article, we'll show you two bear call spread trades you can make this Wednesday.

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.

Two Bear Call Spread Candidates

McDonald’s (MCD) is sitting below the 21, 50 and 200-day moving averages and the Barchart Technical Opinion rating is a 100% Sell with a Strongest short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Relative Strength just crossed below 50%. The market is indicating support for a bearish trend.

Looking at the chart there are plenty of areas of potential resistance around 280.

McDonald's is a leading fast-food chain that currently operates more restaurants globally.

The company mainly operates and franchises quick-service restaurants under the McDonald's brand. 

Majority of the company's restaurant worldwide are owned and operated by independent local business men as well as women.

The company's revenues include sales by company-operated restaurants and fees from restaurants, which are managed by franchisees. The business is managed as a distinct geographic segment.

The company had begun operating its results under a new organizational structure. U.S.- This is the company's largest segment.

The segment remains unchanged despite the new organizational structure. International Operated segment - The segment comprises wholly-owned markets, or countries where the company operates.

International Developmental Licensed Markets - The segment comprises primarily developmental license and affiliate markets in the McDonald's system. Corporate activities are also part of this segment.

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

MCD Bear Call Spread: September $280 – $285 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. You can find ideas like this using the bear call spread screener.

This particular idea involves selling the September expiry $280 strike call and buying the $285 strike call.

Selling this spread results in a credit of around $0.47 or $47 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 – 0.47 x 100 = $453.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 10.38%.

The spread will achieve the maximum profit if MCD closes below $280 on September 18, in which case the entire spread would expire worthless allowing the premium seller to keep the $47 option premium.

The maximum loss will occur if MCD closes above $285 on September 18, which would see the premium seller lose $453 on the trade. 

The breakeven point for the bear call spread is $280.47 which is calculated as $280 plus the $0.47 option premium per contract.

Let’s look at another idea, this time on Vistra Energy (VST) which was another stock that came up on my bearish scans.

VST Bear Call Spread: September $150 – $155 Bear Call Spread

This bear call spread trade also involves using the September expiration on VST and selling the 150-155 call spread.

Selling this spread results in a credit of around $0.68 or $68 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 – 0.68 x 100 = $432.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 15.74%. 

The spread will achieve the maximum profit if VST closes below $150 on September 18, in which case the entire spread would expire worthless allowing the premium seller to keep the $68 option premium.

The maximum loss will occur if VST closes above $155 on September 18, which would see the premium seller lose $432 on the trade. 

The breakeven point for the bear call spread is $150.68 which is calculated as $150 plus the $0.68 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 MCD bear call spread, I would set a stop loss if the stock traded above $275. 

For the VST trade, I would close for a loss if the stock broke through $147.50.

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.