Using the Bear Call Calendar Spread to Your Advantage
The bear call calendar spread is a combination of the option credit spread and calendar spread strategies. It is simply a credit spread but with an expiration date variation. You will have one leg of the position expiring in the front (nearest) month, usually between 30-45 days, and the other leg in a later (back) month.
The front-month position will be short (sold) and the later month, long (bought). Both legs will contain an equal number of options positions.
The strike (exercise) price of the front-month call options will also be lower than the back month call options
Bear Call Calendar Spread Example
Let’s say the overall market has turned bearish and we are interested in trading options with a bearish strategy on the SPY – the Exchange Traded Fund (ETF) which mimics the S&P 500 index. We decide upon a bear call calendar spread as follows:
Sell October SPY $117 call options
Buy November SPY $120 call options
Credit Received = 47 cents per position
We take out 10 positions for a total $470 credit.
We then analyze the above position which produces the following risk graph.
Our upper breakeven point is $22.38 which means the SPY can rise to that level before we start losing money. Above that, our loss sets in and falls away to a maximum loss of around $2,500 once the SPY cracks above $160.
On the downside, our maximum profit of $2,500 is achieved if the SPY closes at $117 on the October expiration date. If the SPY falls lower than 117 before then, our profit gradually tapers off but will always be no less than our original $470 credit received when we initiated the transaction.
So this is definitely a bearish option spread trading strategy, but with an upside that is protected by our longer-dated call options.