How To Sell Bear Call Spreads: Beginners options tutorial on how to make money when stocks drop

Summary

In this video, the speaker discusses strategies for making money in the stock market, particularly during downturns like the one experienced in September. They focus on selling bear call spreads, a technique used to profit from a market decline or sideways movement. The speaker outlines the process of setting up a bear call spread, which involves selling an out-of-the-money call option and buying a deeper out-of-the-money call option to hedge. They emphasize the importance of having sufficient capital to cover potential losses and highlight the historical tendency of the market to decline in September. The video also covers the potential pros and cons of this strategy, including the statistical favorability of the trade and the need for a capital-intensive approach.

Takeaways

• 📉 The video discusses strategies for making money from the stock market, particularly during downturns like the one experienced in September.
• 🐻 The presenter introduces the concept of selling bear call spreads as a strategy to collect premiums while waiting for market uncertainty to pass.
• 💰 It's emphasized that this strategy is not a 'get rich quick' scheme, but can yield modest returns, such as a couple of hundred dollars from selling contracts.
• 💼 The presenter advises ensuring that one's portfolio can handle this strategy and having sufficient capital to cover the purchase of 100 shares of the underlying stock if needed.
• 📈 The video references historical data suggesting that September tends to be a down month for the stock market, with an average drop of around 0.8%.
• 📊 Technical analysis of the S&P 500 is provided, noting a potential retrace upwards to previous support levels, despite the current downward trend.
• 🔄 The concept of setting up a bear call spread involves selling a call option contract first and then buying an out-of-the-money call option contract to act as a proxy for 100 shares.
• 📆 The video provides a step-by-step guide on how to set up a bear call spread using the thinkorswim platform, with Google (GOOGL) as an example.
• 🤑 The presenter outlines two scenarios for the expiration day: if the stock price stays below the strike price, or if it rises and triggers a buy stop order to cover the position.
• 🚫 The video concludes with a discussion of the pros and cons of setting up a bear call spread, including the need for capital to cover potential share purchases and the risk of gap-ups in stock prices.

Q & A

What is the main strategy discussed in the video for making money from the stock market?

The main strategy discussed in the video is selling bear call spreads, which involves collecting premiums by selling call options contracts while expecting the stock market to drop or trend sideways.

Why is it important to have capital to cover 100 shares of the underlying stock when selling bear call spreads?

Having capital to cover 100 shares of the underlying stock is important because it allows the trader to convert the bear call spread into a covered call if the stock price rises above the strike price, thus managing the risk of potential losses.

What does the video suggest about the stock market's typical performance in September based on historical data?

The video suggests that historically, September has often been a down month for the stock market, with an average drop of around 0.8 percent based on data from 1950 to 2022.

How does the speaker plan to handle the situation if the stock price rises above the strike price of the bear call spread?

If the stock price rises above the strike price, the speaker plans to buy 100 shares of the stock at a specified price (buy stop order) to cover the potential obligation from the sold call option contract.

What is the significance of the RSI level mentioned in the video in relation to the stock market's behavior?

The RSI level of around 33 mentioned in the video is significant because it is a level at which the S&P 500 has historically tended to bounce back, indicating potential reversals in the market trend.

Why does the speaker recommend watching cover call videos before this video on bear call spreads?

The speaker recommends watching cover call videos first because the concepts and strategies involved in setting up a bear call spread are similar to those of a covered call, and understanding the latter will make the former easier to grasp.

What is the role of the Federal Reserve's interest rate decisions in the stock market's performance as discussed in the video?

The video discusses that the Federal Reserve's decision to keep interest rates high to tame inflation has led to a negative reaction in the stock market, causing many stocks to sell off.

What is the 'Santa Claus rally' mentioned in the video, and how does it relate to the stock market's performance in November and December?

The 'Santa Claus rally' is a term used to describe the typical rise in the stock market during November and December, where portfolio managers often reallocate portfolios and buy more shares to show positive performance to clients before the end of the year.

How does the video describe the process of setting up a bear call spread using Google as an example?

The video describes setting up a bear call spread by first buying an out-of-the-money call option contract to act as a proxy for 100 shares, then selling a call option contract at a higher strike price to collect a premium. The goal is for the stock price to not reach the higher strike price by expiration.

What are the pros and cons of setting up a bear call spread as outlined in the video?

Pros include the strategy being statistically favorable as it can profit from the stock going down, sideways, or not rising enough by expiration. Cons include the need for capital to cover 100 shares if the stock rises, the risk of a gap up causing the buy stop order to be triggered too late, and the strategy being more capital-intensive.