All about investment

By: Shaun Rosenberg

A bear call spread is a strategy that will let you take advantage of a falling market. One of the major benefits of this technique is that you do not have to be completely right. Even though this is a bearish strategy the stock does not necessarily have to go down for you to make money. It can go sideways or even up a little.

So how can this happen? This strategy takes advantage of calls. A call gives the buyer the right to buy a stock at a given price on or before a given day. For this they pay a premium. A seller would get the premium but would have the obligation to buy the stock at that given price on or before the given date.

With this spread you are taking advantage of the seller position. Let us look at an example. You find a stock that is at $42 and you believe it is heading down. You decide to sell the $45 call on this stock. With this you make $1.

Now as long as the stock stays below $45 you will keep the $1 profit. The problem with this is that you have an unlimited loss potential. If the stock heads up to say $70 you would have to buy it at $70 and sell it at $45. A loss of $24 considering the $1 profit.

Because you do not want to take a trade that gives you an unlimited possible loss you also buy the $50 call for maybe $.30. Now your total profit is only $.70. However, now you can buy the stock at $50 if you need to. So even if the stock goes to $70 you can still buy it at $50. Your possible loss is now only $4.3.

Because the stock only needs to stay below $45 for you to make money the chances of you succeeding are higher then if you would try to short the stock.

The bear call spread also has another twist to it. If the stock rallys to say $48 and you now believe that the stock is heading up you may choose to buy back the $45 call for a loss but keep the $50 call. Provided there is enough time left before expiration the $50 call will appreciate as the stock price climbs. It might even pay for the loss that you took on the $45 call.

For more information on bear call spreads visit http://www.stocks-simplified.com/bear_call_spread.html For more information on trading in the stock market visit http://www.stocks-simplified.com