Options Strategy – Bear Call Credit Spread – Strike selection

Considering we have chosen Bear Call Credit Spread (bearish outlook and we expect the stock price to drop) as a strategy that we intend to deploy, we may need to choose a pair of strikes. There are numerous pair of strikes that we can choose from. In the screenshot below, I have chosen 3 pairs of strikes that represent In-The-Money (ITM), Near At-The-Money (Near ATM) and Out-The-Money (OTM). Which pair provides the optimal return?

1. Strike 95-100 (See 2), Both ITM strikes, Stock/Underlying Price @ $109.97 (See 1)
Sell 95 Call @ ~$16.20
Buy 100 Call @  ~$12.00
Total Premium Collected : $4.20 ($16.20 – $12.00)
Maximum Losses : $0.80 ($5 strike – $4.2Total Premium)
Note: In order to collect total premium of $4.20, the stock needs to drop from the existing price of $109.97 to $95 upon options expire. It is a low probability trade as we are looking at ~$15 drop in short time frame.

2. Strike 110-115 (See 3), Both Near ATM strikes, Stock/Underlying Price @ $109.97 (See 1)
Sell 110 Call @ ~$5.25
Buy 115 Call @  ~$3.05
Total Premium Collected : $2.20 ($5.25-$3.05)
Maximum Losses : $2.80 ($5 strike – $2.2Total Premium)
Note: In order to collect total premium of $2.20, the stock needs to stay below $110 upon options expire. It is an average probability trade as we expect the stock to be flat or going down when options mature.

3. Strike 125-130 (See 4), Both OTM strikes, Stock/Underlying Price @ $109.97 (See 1)
Sell 125 Call @ ~$0.79
Buy 130 Call @  ~$0.38
Total Premium Collected : $0.41 ($0.79-$0.38)
Maximum Losses : $4.59 ($5 strike – $0.41Total Premium)
Note: In order to collect total premium  of $0.41, the stock needs to stay below $125 upon options expire. It is a high probability trade as the stock is currently trading at $109.97 and there is an upside “buffer/cushion” of $15. However, if we look at the max losses vs total premium that we can collect in this trades, it does not warrant a good risk-reward as we are making too little to justify the risk that we are taking.

Conclusion – #2 should represent the optimal trades by providing the best risk-reward ratio to the traders (ignore fundamental & technical analysis and only focusing on statistical analysis).

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