Credit Call Vertical Spread : Option Trading Strategy

Do you know that credit call spreads are used frequently by most savvy options traders?

In this article,  we’ll see what is a credit call spread.

First of all, Credit Call Spread is also known as Bear Call Vertical and Short Call Vertical and CCS.

Credit Call Vertical is formed by Selling a Call (near to current price)
and Buying a Call (far from current price). It is considered a limited-risk and limited-reward strategy.

It is a credit strategy that means you receive a premium when you open a position.
And is a bearish strategy means you believe that stock will remain below a certain price.

Example of a Credit Call Spread:

Let’s assume that a stock is currently trading at $40 and you are mildly bearish on the stock and you believe that stock will not go above 45 by the expiry..

You can open a credit call spread by selling a 45 strike call for the premium of $2.70 and buying a 30 call for $1. In this case, the investor will receive a net credit of $170 to open this position ($270 – $100).

If stock price remains below $45 at expiry, you will make a profit of $170.

Near leg can be ITM/ATM/OTM and far leg will be further away from it..

So 3 key takeaways..

• Credit Call Spread is a bearish strategy
• You receive a premium when you open a position
• You sell near leg and buy far leg within same expiry and with different strikes

Why Credit Call Spread works?

Pros:

1. Limited (smaller) risk: CCS is a low risk stock option strategy. Your maximum loss is limited [Spread width – Premium paid]
2. Higher probability of profit : Most of the option expire worthless
3. Time Decay: Time is in you favor
4. Flexibility : Easy to roll and adjust.

What are cons of this strategy?

Cons:

1. You are giving away the opportunity to make larger gains
2. Profit is limited.

What can go wrong?

Although Credit Call Spread is a high probability strategy and if used properly, works very well. But if stock makes a big parabolic move upside, than this can go south!

In that case, you might need to make some adjustments to the position. There are many different ways to make adjustments depending on market condition.

If you are interested in learning CCS or any options strategy via live 1-2-1 sessions, please contact us – info@bullishoption.com

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