We have previously discussed the Bear Call Calendar Spread. So the logical question might be, “how does this compare with a ‘regular’ Bear Call Credit Spread?”
Below is a risk graph using exactly the same number of option contracts, only this time, all with October expiration dates.
See how it compares with the payoff diagram of the Bear Call Calendar Spread – see below.
If we had only used October SPY options for both legs. Our upside breakeven would’ve been reduced to $118.59 and above that, falling away to a maximum loss of $1,400.
On the downside, however, our maximum profit would be $1,600 if the SPY closes below $117 at expiration date. This $1,600 would be the initial credit premium we received which we note is greater than for the bear call calendar spread at $1.60 per contract.
Since our choice of option trading strategies is really just a matter of risk vs reward over a range of strike prices up to a given expiration date, you would be more inclined to enter a bear call calendar spread if you believe the price action of the underlying will remain pretty much unchanged up to the last week before expiration.
You will receive the maximum profit potential this way. This strategy is therefore most suitable for a stock whose price action has low volatility over time. Consulting weekly and monthly charts will help you here.