Now that we have described how to do a Bear Call Spread, let's go through an example. The call options you are going to use for this example are options on the stock: McDonalds Corporation (MCD).

This example comes from the CallsAndPuts.com "Bear Call Spreads" data. Let's go through the procedures step-by-step. To summarize this option play:



This strategy requires the investor to buy out-of-the-money (higher) call options and sell in-the-money (lower) call options on the same stock with the same expiration date. This is also known as a vertical bear call spread. If the stock price closes below the in-the-money (lower) call option strike price on the expiration date, then the investor reaches maximum profits. If the stock price increases above the out-of-the-money (higher) call option strike price at the expiration date, then the investor will experience maximum loss, which is the difference between the two strike prices minus the net credit received when the spread was established.

Net Credit = Money received from selling in-the-money call options - Money paid for buying out-of-the-money call options
Maximum Profit Potential = Net Credit Received
Maximum Loss Potential = Difference Between Strike Prices - Net Credit Received

1) You select MCD from the "June Bear Call Spreads" listing:

2) You select MCD based on the criteria you've established for a good Bear Call Spread candidate (This differs for each option investor based on risk versus reward criteria).

3) You access the Stock, Option, BB&RSI links and based on your risk versus reward criteria determine that MCD is your Bear Call Spread investment choice.

4) Let's also assume that you have an account with ETrade and want to place your option orders for the Bear Call Spread positions.

5) Once you log into your account on www.etrade.com, access the Trading > Enter Option Order link. 

6) Place your option order to buy 7 out-of-the-money (higher) option contracts (MCDFG = Jun $35) by selecting the following fields:

7) This purchase of out-of-the-money MCD call options is for 7 option contracts at market price. If you want your purchase to execute at a specific option price, select the "Limit" radial button and enter the price.  

8) Now place your order to sell 7 in-the-money (lower) call option contracts (MCDFF = Jun $30) by selecting the following fields:

9) This sale of in-the-money MCD call options is for 7 option contracts at market price. If you want your sale to execute at a specific option strike price, select the "Limit" radial button and enter the price.  

10) If the stock price closes below the in-the-money (lower) call option strike price on the expiration date, then the investor reaches maximum profits. If the stock price increases above the out-of-the-money (higher) call option strike price at the expiration date, then the investor will experience maximum loss, which is the difference between the two strike prices minus the net credit received when the spread was established.

To summarize:
Net Credit = Money received from selling in-the-money call options - Money paid for buying out-of-the-money call options
Maximum Profit Potential = Net Credit Received
Maximum Loss Potential = Difference Between Strike Prices - Net Credit Received

CoveredCalls.com

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