Josip Causic

Working Bearish Options for Profits

by Josip Causic   01/12/09

In my last article, "Buyers versus Casinos," I clearly stated that being a seller (casino) is profitable. Since then I have received a "hate e-mail" by an anonymous reader who completely disagrees with me without giving any reasons whatsoever. This article will lay out the arguments for the credit spreads in order to point out the fact -- and not an uninformed opinion -- that being a seller works quite profitably.

In order to illustrate this point, I will share one of my current credit call trades.

The Case for Credit Spreads

A Bear Call is basically a vertical credit spread in which one strike price is being sold while the one above it is being bought for the same month. The sold strike price brings in more premium than the bought strike price, which produces the credit. The most-essential part of the trade is actually determining which strike price to sell.

Knowing which option strategy to use comes only after already having the technical analysis completed. On the day I chose to place a Bear Call spread, the chart of the QQQQ, the exchange-traded fund that tracks the Nasdaq, looked identical to Figure 1 below.

Figure 1

Breaking Down the Credit Spread

It took me only a few moments to conclude that the 33 zone/area (highlighted in yellow) on the QQQQ would act as a major resistance; therefore, I selected a bearish strategy from my arsenal -- Bear Call. At that time, a couple of days before Halloween, I did have a choice to make between selecting November or December expiry. I picked December due to the fact that my risk to reward ratio worked much better.