How to plan a Bear Call Spread? When to plan Bear Call Spread?

How to plan a Bear Call Spread? When to plan Bear Call Spread?

For Example, say SBICARD is going to give some back in the short term with some of the uncertainty surrounding the release of various card regulations/interest rates and some profit takings. On the technical side, the 20 day MACD is diverging to the down side and RSI is indicating an overbought condition.
We had some technical indicators and some fundamental uncertainty we thought would lead skittish traders to take some profits off the table. The Commit Criteria is short, sweet and it made sense. Little did we know at the time but this was a turning point for SBICARD and it is off about 20% since this call.
Our Tactic was a Bear Call spread two strikes above where SBICARD was trading. One of our intermediate tactics and in this instance it had a high probability of success.

Example:

Say Stock trading at 893
Bear Call Spread on SBICARD, 910/920

The Bear Call spread Set up:

Sell JAN 910 Call at 3.90
Buy JAN 920 Call at 2.10

Net Credit: 1.80
Max Profit: 1.80, 22% return on risk. (Book profits around 80-90% of returns)
Max Risk: 8.20
Breakeven Point: 911.80
POP: 72% probability of max profit.

The Greeks in Bear Call Spread:

Theta (Time Value): Time is our Friend, the longer that SBICARD stays below our breakeven of 911.80 the stronger our chance of a profit.
Vega (Volatility): For this trade we want volatility to decrease for the duration of the position. An increase in volatility with SBICARD can easily threaten our Breakeven (B/E) on the down side.

The last part of our Tactical Employment is an understanding of the Greek effects. In this case Vega and Theta are what we were concerned with and in a bear call spread. Theta is our friend because the longer that we stayed below our breakeven, the better our chance of profit. We also wanted to keep volatility in our scan because an increase in volatility could decrease our chances of success.

Profit Target: Profit Target is 1.80, 22% return on risk. Book profits around 80-90% return on premium.

Threats to Success:
– Any Data is being reported for a positive report could cause a move to the upside.
– We are going against the longer-term trend of SBICARD and buyers could step in if they don’t see any more down side.

Stop Loss/Contingency Plan:
– Entry Criteria/Outlook becomes invalid
– We will set our stop loss 25%…Eject if the premium gets to 2.25
Our threats to success over the trade are researched and listed so we don’t drop them out of our scan.

Our Eject Criteria is set and can not changed.

Exit Plan
● Profit Target or Stop Loss Reached.
● To close position, simultaneously,
• Buy JAN10 910 Call
• Sell JAN10 920 Call
This is all there is to putting a plan together.

 

CONCLUSION

Bearing view Strategy here Bear Call Spread is implement in bear outlook of the market for the stock or index. Believe me, the time invested in putting a plan together is well worth the effort.  Having a plan will substantially increase your trading Discipline,  lays out your Risk Management plan and will lead to consistent Superior Execution. You can complete your plan before going into trade. Planning process represents the minimum knowledge we want to have before we open a trade and it is the tool that gives us the confidence we need to execute our trades with Discipline, manage our risk based on our comfort with the current market climate and consistently manage our trades with Superior Execution.