PowerOptions WeBlog Kaiser (KALU) Aluminum More Than 2X Profit in Q1 Options Trading, Channeling Stocks and Bollinger Bands Exxon Mobil (XOM) First Quarter Profit Grows 17% Verizon (VZ) up Nearly 10% on First Quarter Earnings McDonald’s (MCD) Sees 24% Profit Spike in First Quarte more articles... This strategy is to realize a profit by making cash that is a net credit formed by the difference in a SOLD CALL price and a BOUGHT CALL price. While the stock goes down, the investor keeps the net credit (difference in premiums).
	SELL a CALL at or out of the money (lower strike price).
	BUY a CALL one or more strikes above #1 CALL in the same month, this provides the upside safety.
	The margin requirement is the difference between the strike prices, usually 5 points/dollars.
	The maximum risk is the difference between the strike prices, less the net credit (difference in premiums).
	The maximum profit is the net credit (difference in premiums).
	The break even point is the lower strike price (#1) plus the net credit.
	Profit is realized when the stock price falls below this number.
	Maximum profit is made when the stock price falls below the lower strike price (#1 CALL).
	A profit is realized at any stock price between the break even point and the net credit.
The return calculations for the Bear-Call Credit Spread are:
% Return =	(Premium on SOLD CALL - Premium on BOUGHT CALL) ÷ (Margin - Net Credit)
% Return =	(Net Credit) ÷ (Margin - Net Credit)
Where...
Margin =	SOLD CALL strike price - BOUGHT CALL strike price
Net Credit =	Premium on SOLD CALL - Premium on BOUGHT CALL
Example: Stock XYZ at $90 per share.
Write (Sell) the SEP 100 CALL for $3.00
Buy the SEP 105 CALL for $1.85
% Return =	(Premium on SOLD CALL - Premium on BOUGHT CALL) ÷ (Margin - Net Credit)
% Return =	(3.00 - 1.85) ÷ ((105 - 100) - (3.00 - 1.85)) = 30% if stock is < $100
Max. Risk =	Margin - Net Credit = $5 - $1.15 = $3.85, if stock is > $105
Max. Profit =	Net Credit = $1.15, if stock is < $100
Break Even =	Lower Strike + Net Credit = $100 + $1.15 = $101.15

Advantages of this strategy:
	This is a BEARISH strategy, the profit can only be realized when the stock price falls from current price to a number between the break even point and net credit.
	If the stock goes very low gains are limited to the net credit.
	Losses are limited to the difference in strike prices, usually about 5 points minus the net credit.
	Risk can be controlled by how far out of the money the sold option is positioned. Further OTM spreads will yield less profit, but are safer and have a higher break even point.
	In the face of a rise the investor can buy back the SOLD CALL and have unlimited profit from BOUGHT CALL.
	Highly leveraged because of the low margin requirement on the spread.
	This is an option only strategy, no shares of stock are actually owned. (uncovered position).

Cautions with this strategy:
	Anytime the underlying stock/index price is below the short put strike price, there is a chance that you may have to purchase stock to meet the short put obligation. Were this to happen you could sell the shares at the market pricing, or use the long put to sell the shares at the long put strike price.
	The credit you receive for the trade is generally much smaller than the max risk of the trade, therefore it is prudent to close the short option before the position is at max loss. Many traders do this when the short option is near-the-money.
	If you have closed the short option half of the trade you may want to consider holding the long option to possibly profit from continued directional momentum in the underlying. However, the danger is that the underlying will correct and whipsaw in the other direction.

Research Tips:
	If you like the risk/reward of the Credit Spread strategy but are bullish: Bull-Put Credit Spread
	If you are Bearish on the stock but prefer Debit spreads: Bear-Put Debit Spreads.
	For more information on the Parity Strategy to Bear-Call Credit spreads: Parity Trading - Option Spreads and Parity Option Trades Revisited