The stock market is set to open sharply lower today as analysts digest a higher-for-longer interest rate environment that seemed unfathomable a few short months ago. For many stock traders, that means opportunities in short positions—risky, time-consuming to manage, and leaving no room for error.

However, several strategies are available for options traders to take advantage of this gloomy trading environment. You can write naked puts or sell covered calls if you have a specific asset in mind—or you could trade a bear call spread instead.

What is a Bear Call Spread?

A bear call or a call credit spread is an options trading strategy that requires selling a call option (usually out-of-the-money or OTM) and buying another with a higher strike price on the same underlying asset and with the same expiration date. The trader receives a net credit for this setup, and the strategy is perfect during moderately bearish markets, as the name suggests. 

The maximum profit for a bear call spread is the net credit received at the start of the trade, and that will happen if the underlying asset’s price stays below the short call strike. On the other hand, the trade ends at a maximum loss if the asset’s price trades above the long call strike at expiration. 

A bear call has a defined profit/loss profile, so they’re both capped. 

Now that we have the definitions out of the way, we can look for potential trade ideas.

Bear Call Spread on the S&P 500 

For this trade, I'm not interested in looking at a single stock. My thesis is that the broad market will continue to experience near-term volatility, so, I'd like to capitalize on that. The S&P 500 SPDR ETF is my favorite asset to use for such a strategy as it tracks the performance of the entire index. 

To get started, I'll visit the SPY asset page, then click on “vertical spreads” under “Option Strategies” on the left-hand menu. Then, I'll click the “Bear Call" tab. 

Then, I'll click the “screen” link and add the following filters: 

• Probability of Profit: More than 80%. This filter helps me maximize my potential chance of profit. Probability of profit measures profit starting from one cent, so this should not be confused with the probability of achieving maximum profit.
• Moneyless Leg 1: -25% to 5%. The first leg of the bear call is the short call, and this value range puts the asset trading price OTM or ATM up to 5%. Remember, you want the underlying asset to stay below your short call strike until expiration, so why not start there?
• Symbol and Expiration Date: As mentioned, I want SPY bear call trades. For the expiration, I set it search for options expiring at any point until March 20, 2024, 67 days from today. This gives me lots of time to adjust my trade (if necessary) while having the privilege of closing my position whenever I want to. 

With these filters set, here are the results: 

I arranged the results based on the highest to lowest max profit (by clicking on the Max profit column header). Let’s take the top one and discuss its potential results. 

Trade and Profit/Loss Profile

According to the screen, I can sell a $615-strike call expiring March 21, 2025 and receive $3.20, then buy a $680-strike call for 7 cents with the same expiration. The resulting net credit will be $3.13 or $313 per contract, and the maximum loss for the trade is $61.87 or $6,187, which is calculated by taking the width of the spread ($680 - $615 = $65) and then subtracting the net credit received.

You might think this trade is heavily skewed, as the maximum loss is nearly twenty times the profit. However, you need to consider that this trade has an 81.7% probability of profit and a 98.86% probability of expiring out of the money. The safer the bear call trade is, the higher the potential loss—that’s how it is. 

Traders can always increase the chances of keeping the trade profitable while avoiding excessive losses by attaching take-profit and stop-loss orders at the onset. Usually, I set my take-profit level at 70% of the net premium. So, if it were me, I’d close this trade once the premium drops to around 94 cents per share. That allows me to pocket $219, or 70% of $313. 

As for the maximum loss, I’d set it at 1.5x the credit, which is around $470. That way, the brokerage works for me - I mean, who wants to watch the trade every second of every day?

Final Thoughts

It’s clear that volatility is back, and markets are likely in for a rough ride in January. However, with options, traders can capitalize on any market condition - with the right strategy. But even with high probabilities of profit, you should never be so complacent as to leave a trade unchecked. Always keep your eyes open for new developments in the market and, as always, do your due diligence.