How to Enter a Bearish Call Credit Spread

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Call credit spread: In tonight's video, we're going to go for all the trades that we made on Tuesday, December 22nd. It was a pretty easy day. A lot of, things worked in our favor. Solar City moved down a considerable amount so we made a couple hundred dollars back there so overall it was a nice day.

A nice day to kind of sit back and take some money off the table as we've been doing the last couple days, you can see, inside the membership area on the trade alerts page. You can see all the trades that we've made over the last seven to ten days and we've been consistently taking a lot of money off all of our trades off with some pretty good profits and we just keep banking them which has been pretty nice and decent.

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So hopefully that streak will continue. Today we took off our XOP, we took off our strangle and XOP, banked a $140.00 profit on this. Finally got filled, had to use a couple of different orders to try and get filled on this thing and it seemed like the market again, like I had mentioned yesterday, was trading all around our price but then finally eventually filled.

So big drop in the stock from when we actually entered the position, so the stock definitely moved against us, it did not move in our favor, but over time since the drop didn't happen very quick and it [inaudible 00:01:17] as a result had continued to move down during that period, we did see a nice little profit on this trade.

So, the stock moved against us but implied volatility kind of more than over shadowed that particular trade. We'll come back to EWZ, we'll come back to the other closing trade which was OIH. Had another strangle on OIH from January, went ahead and closed out a $22.00 debit.

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Again, the reason I had a couple of people emailed me and said: "Why not leave it on for the extra $22.00?" And the reason is that you take money off the table. In this case, we took a $62.00 profit on the small trade, because it's not worth holding it for another thirty days basically for $22.00 in premium that we're gonna get out of it.

We've made most of the money that we can make on it, over 50%, and we've done so in about two weeks, so why hold it another four weeks for the opportunity to maybe lose some money on OIH if it moves against us.

In that same vain, implied volatility has again dropped in OIH and the stock has moved against us so even though the stocks moved against, that drop in implied volatility more than overshadowed the stock move which allowed us to be neutral on this trade, see the stock actually make a move against our position and still have an opportunity to close this thing out with a win.

The other trade that we got into today, or the only trade we got into today, is a small credit spread position in EWZ. Notice that we sold the 22 calls, bought the 24 calls, so we're doing a $2.00 wide credit spread. You can do them a dollar wide if you want to if you have a smaller account and you need to reduce your risk and keep your position size smaller.

You can do them as a one dollar wide spread, we just did them as a two dollar wide spread and taking a little bit more money per contract that we sold. So we sold three contracts, and each of these is three spreads, took in forty-eight cents for each of these. Gives us an overall probability of profits somewhere around sixty-eight, sixty-nine percent.

Now implied volatility is just above the fiftieth percentile, so we don't want to aggressive with this type of trade, right? So implied volatility isn't in the sixty or seventy or eightieth percentile, it's just barely over that fiftieth percentile. So, we want to do things that are not as aggressive.

Things like credit spreads or butterflies or iron condors if you were just neutral on EWZ. In my opinion, I just think the bearish side of the trade, meaning the call spread side, had better pricing. You could get more for the same probability of success on the call side than you could on the put side.

So, in this case, there was nothing that we looked at that said "Hey, you know, we think EWZ is gonna go lower." It's just when you look at the same probability of success on either side you can see that EWZ gives us a little more credit for the same type of spread that we might be buying.

So again, we do have the January position. This is a February position that we started, so we still have the January position with EWZ. This is a new February trade that we're stacking on top here. We sold the twenty-twos, bought the twenty fours which are right below it, $2.00 out.

And again, it was just because this was where most of the activity was, and I don't if that was all option off of members or not, that'd be cool if it were a lot of people trading it but there was a lot of people trading EWZ today, especially in these two strikes and that's where a lot of the activity was.

Hence some of the spreads, the bid [inaudible 00:04:32] spreads were tighter, so you could get into and out of these pretty easy. So, I don't think anybody had any issue, I mean we didn't have any issue getting into it pretty quickly after we entered the order.

We got our three contracts billed, which is still an incredibly small position for us but I'm sure if you wanted to scale or scale down it, you wouldn't have any issues at all getting into it. So, as always, hope you guys enjoy these videos. If you guys have any comments or questions, please ask them right below here in the comments section so that everybody has a chance to see your question and get a response back from me.

If you're watching this video somewhere else out there online or on Youtube, you just have to understand that this video is coming to you about fifteen to twenty days after it's sent out to our members.

So if you want real-time alerts and a video that goes along with those alerts, every single night like the one you're watching, you have to sign up for a membership at Optionalpha.com. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.