2 Bear Call Spread Trade Ideas For This Tuesday

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.

Meta Platforms (META) has dropped nearly 52% year-to-date and is rated a 72% Sell with an average short term outlook on maintaining the current direction.  Looking at the chart there are plenty of areas of potential resistance between 170 and 180.

Meta Platforms is the world's largest social media platform. The company's portfolio offering evolved from a single Facebook app to multiple apps like photo and video sharing app Instagram and WhatsApp messaging app owing to acquisitions. Along with in-house developed Messenger, these apps now form Meta's family of products used by billions of people on a monthly basis. Meta uses metrics like daily active users (DAUs) and monthly active users (MAUs) to measure Facebook's user base. Marketers buy ads that can appear on multiple platforms including Meta, Instagram, Messenger and third-party applications and websites. Meta, thanks to its huge user base gained a significant market share in the advertising space wherein it faces tough competition from Google, Twitter, Amazon and Snapchat-parent Snap. Meta also faces significant competition from the likes of Apple (messaging), YouTube (advertising and video), Bytedance (social media) and Tencent (messaging and social media).

META is currently below declining 21 and 50-day moving averages and could be a good candidate for a bearish option trade.

Implied volatility is high at around 44%. The twelve-month low for implied volatility is 13.67% and the twelve month high is 82.29%. The IV Percentile is 67%.

That means it could be a great time to be a seller of options on META. That coupled with the potential bearish action makes it a candidate for a bear call spread.

META Bear Call Spread: September 180 – 185 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 September expiry 180 strike call and buying the 185 strike call.

Selling this spread results in a credit of around $0.70 or $70 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 – 0.70 x 100 = $430.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 16.28%.

The spread will achieve the maximum profit if META closes below 180 on September 16, in which case the entire spread would expire worthless allowing the premium seller to keep the $70 option premium.

The maximum loss will occur if AAPL closes above 185 on September, which would see the premium seller lose $430 on the trade. 

The breakeven point for the bear call Spread is 180.70 which is calculated as 180 plus the $0.70 option premium per contract.

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

BABA Bear Call Spread: September 100 – 105 Bear Call Spread

This bear call spread trade involves using the September expiration on BABA and selling the 100-105 call spread.

Selling this spread results in a credit of around $0.75 or $75 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 – 0.75 x 100 = $425.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 17.65%.

The spread will achieve the maximum profit if BABA closes below 100 on September 16, in which case the entire spread would expire worthless allowing the premium seller to keep the $75 option premium.

The maximum loss will occur if BABA closes above 105 on September 16, which would see the premium seller lose $425 on the trade. 

The breakeven point for the Bear call Spread is 100.75 which is calculated as 1000 plus the $0.75 option premium per contract.

Alibaba Group Holding is one of the leading e-commerce giants in China. Over the last few years, the company has transformed itself from being a traditional e-commerce company to a conglomerate that has businesses ranging from logistics and food delivery to cloud computing. Alibaba Group is represented by three businesses' Alibaba.com, Taobao, and Tmall. The company's businesses account for more than half of all online retail sales in China, which is one of the world's fastest-growing e-commerce markets. Taobao is one of Alibaba Group's most profitable marketplaces that generates for more than 80% of its sales, thanks to soaring demand for high-quality imported brands in China.The company is well positioned in the New Retail space. In this space, it aims to bring together digital payments, e-commerce, food delivery and other parts of the business into one big ecosystem. The ubiquity of smartphones and evolution of physical and online commerce are helping the company to gain momentum in this space.

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.

A good rule of thumb for bear call spreads is to close the trade if the price of the spread doubles.

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.

*Disclaimer: On the date of publication, Gavin McMaster did have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, August 22, 2022.

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