Learn how to calculate the maximum potential profit when trading a bear call credit spread.

Alright. Hey everyone. This is Kirk here again from Option Alpha and in this video, we’re going to walk through a bear call spread profit calculation. You might also hear people call this a call credit spread or also, a short call spread as well. It’s all the same stuff. It’s just the way that people use the different terminology for it. But this is really easy to calculate for short call spreads and bear call spreads. We’re just going to use this very simple payoff diagram framework as always. This is the zero barrier and then this is the plus side which means you’re making money, and then of course, the negative side which means that you’re losing money. And a bear call spread payoff diagram looks like this. It basically pivots at two points. These two points are where you buy or sell the individual call option contracts. And you can see that the payoff diagram has this flat line here in the positive section at any price below your first strike price which is here. This is the point at which you sell a contract, so in this case, you might sell one call option at say a 90 strike and here, you might buy one call option at a 92 strike and that would create your bear call spread. But notice that the payoff and the potential you can make on the positive side flat lines at any price below that call option contract strike which is 90. And so, what this means is that a bear call spread actually has fixed profit potential. You can’t make any more than that particular amount.

How do we come up with this amount? Well, this amount that we can make since we’re doing a bear call spread and since it’s a credit spread, is simply the difference between the contracts that we sold and purchased. In this case, we might have sold the 90 strike call option for say $5 and we might have bought the 92 strike call option for $3.50, so the most that we could potentially make on this trade is $1.50 which is the difference between those. We sold the 90 strike call option for $5, so basically, we collected $5, we bought the 92 strike call option for $3.50, so we subtract that debit that we paid, and that leaves us with a positive amount of $1.50. That’s how much we could potentially make. This is that profit potential for the bear call spread. We can obviously make less than that as soon as we start getting above our strike price at 90, but the most that we can make on this position if it goes all the way to expiration and if the stock stays lower, any place below 90 and lower, if the stock ends there and this position expires out of the money, then the most that we can make on this particular trade is the credit that we received which is $1.50. As always, hopefully this helps out. If you guys have any other questions, let us know and until next time, happy trading.

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