Setting up a Call Credit Spreadįor example, imagine the fictional MEOW company is trading at $100 per share. If this happens, both calls expire worthless, and you keep the net credit. You realize your maximum potential profit if the stock price at expiration is equal to or below the strike price of the short call.
Remember, this is what you’re left with after buying a call and selling a call to construct the spread. With a call credit spread, your maximum potential gain is the net credit you received when you opened the spread.
That’s because you also bought the right to purchase the stock, albeit at a higher strike price than the option that you sold. With a call credit spread, you can benefit if the stock price falls, but you also cap your potential losses in case the stock price climbs. Please note: Robinhood does not allow uncovered or “naked” positions. You lose the difference between the strike price and the market price, which theoretically, can be infinite, since there’s no limit on how high a stock price could go. Here’s how: If the stock soars above the strike price and the buyer of the option decides to exercise it, you have no choice but to buy the stock at the prevailing market price to supply the shares. However, unlike a call credit spread, only selling a call on stock you don’t own may involve the risk of unlimited losses - This strategy is also known as selling a naked or uncovered call.
If the stock price closes below the strike price on the expiration date, the option you sold should expire worthless, allowing you to pocket the entire premium. Only selling a call is another choice if you have a relatively bearish to neutral outlook on a stock - You may think the price of the underlying stock will fall in the future, or at least not reach the strike price before the option expires. (It gives you the right to buy shares at a higher price if you are obligated to cover an assignment on the short call.) How is a call credit spread different from only selling a call? If the price of the underlying stock sharply increases, the long call constrains how much money you could lose. This net credit is the maximum profit you can earn using this strategy.īut if things don’t go as expected, your potential losses are limited, too. You start with a net credit since the premium you collect for the short call is greater than the premium you pay for the long call. If your expectation is met, this strategy can allow you to earn a limited profit while capping your potential losses.Īt the outset, you receive a premium for the contract you sold (the short call) and pay a premium for the contract you bought (the long call). You may consider a call credit spread when you expect the price of the underlying stock to remain relatively flat or fall before a certain date (i.e., you have a neutral to bearish outlook). This strategy is also known as a bear call spread or a short call spread. When you open a call credit spread, you sell a call (at a lower strike price) and buy a call (at a higher strike price) both expiring on the same day. The strategy involves one short call and one long call on the same underlying stock.
It comes with a risk of limited losses and the potential for limited profit. A call credit spread is an options trading strategy you might use when you think a stock price will stay relatively flat or fall before a certain date (i.e., you have a neutral to bearish outlook).
0 kommentar(er)
