Profiting from Market Highs: 3 High-Potential Bear Call Trades

US markets are trading around their all-time highs, and with the elections just around the corner, this begs the question: How can investors take advantage of the near-term volatility?

One way is to sell a bear call spread, an options trading strategy in which the investor sells a call option and then buys another with the same expiration date and on the same underlying security- however, with a higher strike price. The combination results in a net credit, which is why the strategy is also sometimes called the call credit spread.

The goal of a bear call spread is for the underlying security to trade below the short strike at expiration. When that happens, both options expire worthless.

However, if the underlying security trades above the short strike at expiration, the trade will start to lose money. Maximum loss occurs when the underlying security trades above the long strike at expiration.

As this options trade has two legs, I find it best to pay attention to your breakeven point before starting the trade. You'll profit from the trade if the underlying security trades below the breakeven point at expiration. 

With that out of the way, let’s screen for some bear call trade ideas before the opening bell.

At the time of this writing, the top results on the default screener suggest a bear call trade on MSFT, NVDA, and BAC. However, at 53-55%, the profit probability is a bit low for my liking, which is why I’ll adjust it.

After clicking the “Set Filters” tab, I added the “Probability of Profit” filter and set it to >70%. All other settings are left alone.

Let’s see the results:

3 Possible Bear Call Trades

And there we have it: 1182 possible results. 

As a conservative trader, I like to err on the side of caution. For that reason, my screen is sorted by risk/reward. If yours isn’t sorted that way, just click on the “Risk/Reward%” headline.

For this article, I’ll explore these top three trades: MSFT, NVDA, and PEP.

Microsoft (MSFT)

Microsoft stock last traded for $428.15 a share.

The Microsoft bear call trade involves selling the $450 strike call, expiring Dec 20, 2024, and collecting $9.35, then buying the $460 strike call for $6.50. The net credit becomes $2.85, or $285 per contract - which is also the maximum profit on the trade. The maximum loss is $7.15 - which works out to a risk-reward ratio of 2.51:1.

Investors who sell this bear call spread will want MSFT stock to trade below the breakeven point of $452.85 at expiration. If that happens, the trade will result in a profit. Maximum profit will occur if MSFT trades below $450 at expiration. Maximum loss occurs if MSFT trades above the long call strike at expiration.

If your brokerage allows it, setting a “good-till-canceled” take-profit order when the credit reaches $0.85 (Around 70% of max profit) makes the brokerage work for you and exit the trade with a respectable profit. That’s the beauty of GTC orders. 

On the flip side, you could also set a stop loss around 50% of the max loss, which would shield you from a complete loss on the trade. If you set the stop loss lower than 50%, you could get stopped out too soon - which is why I prefer setting it around 50-60%.

Two Other Bear Call Trades

The two other trades on the list involve Nvidia and Pepsico.

NVDA stock last traded for $141.54 a share. For the NVDA bear call, you’d sell the $149 strike call, and buy the $154, both expiring November 15. The breakeven point is $150.37, and there’s a 77.04% chance that the options will expire OTM (meaning you’ll achieve the maximum profit condition). 

PEP stock last traded for $171.79 a share. This bear call suggests selling the $175 strike call, and buying the $177.50 - both expiring Nov 15, 2024.

For the Pepsico bear call to work out, you’ll want the stock to trade below the $175.68 breakeven point - if that happens, you’ll earn a profit. If PEP stock trades below the $175 short call strike, you’ll earn $68 per contract sold. 

Final Thoughts For These Three Bear Call Trades

Selling call credit spreads can be a great way to earn money with a high degree of success. However, as with anything related to options trading, you can lose 100% of your investment. That’s why knowing how much you could earn and lose, along with the chances of each happening.

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On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.