A Bear Call Spread in Action
Three weeks ago, I highlighted a trade setup inspired by Tim’s post, “War? UNH! What’s It Good For?” Tim identified a potential bearish opportunity in United Healthcare (UNH), and I followed up with post stating an alternative way to take advantage of te set-up using a high-probability, risk-defined trade to capitalize on the setup.
Fast forward to today, and we can successfully close that position for a gain just shy of 20%. A tidy profit in three weeks time. But markets, much like history, have a way of repeating themselves, and a similar opportunity may be setting up once again.
Why a Bear Call Spread?
A bear call spread—also known as a short call vertical spread—lets traders generate income in bearish or neutral markets while keeping risk defined. Here’s how it works:
- Sell a call option at a strike price above the current stock price.
- Buy a higher strike call to cap risk.
- The goal? Collect premium and profit if the stock stays below the short call strike by expiration.
The UNH Trade Setup
With UNH currently trading around $501.89 and the IV Rank almost pegged (see below), I’m structuring a new bear call spread using the March 28, 2025, expiration (37 days out). The aim? An 80-85% probability of success—balancing risk and reward while leaning on time decay.
Step 1: Selecting the Short Call Strike
Probability is key. I seek a short call strike with an 80% probability of expiring out of the money (OTM). If your trading platform doesn’t show probabilities, delta is a useful proxy—targeting 0.15 to 0.20.
- The 550 call strike fits the bill, with an 85.17% chance of expiring worthless.
- It’s also positioned just beyond the expected price range (+/- $38.58), adding a buffer.
Step 2: Choosing the Long Call Strike
Pairing the short call with a long call creates the spread, defining both risk and reward.
- Buying the 555 call forms a 5-point-wide spread.
- Net Credit (Premium Received): $0.70, or $70 per spread.
- Maximum Risk: $4.30, or $430 per spread.
- Maximum Return: 16.3% if UNH remains below $550 at expiration.
The Trade Mechanics
To enter the position:
- Sell to open the March 28, 2025, 550 strike call.
- Buy to open the March 28, 2025, 555 strike call.
By collecting a $0.70 premium, you establish a position that benefits from time decay and resistance at the short call strike. If UNH remains below $550 through expiration, the spread achieves max profit.
Why This Trade Works
Bear call spreads thrive on probability and risk management:
- Defined Risk: Know your max loss ($430) and max gain ($70) upfront.
- Time Decay Advantage: As expiration nears, options lose value—a tailwind for option sellers.
- High Probability: An 85% success rate favors discipline over guesswork.
Even if UNH drifts higher, as long as it stays beneath $550, the trade reaches full profit.
Risk Management: The Difference Between Professionals and Amateurs
No trade is complete without a clear risk management plan:
- Position Sizing: Risk only 1-5% of your portfolio per trade—no single loss should derail long-term performance.
- Profit-Taking: Rarely hold spreads to expiration. Instead, target 50-75% of the original premium ($0.35-$0.15 in this case) for early exits.
- Stop-Losses: If the spread value doubles or triples ($1.40-$2.10), cut losses and move on.
Key Takeaways
- Volatility Creates Opportunity: Profit doesn’t require a market rally. Defined-risk strategies like bear call spreads thrive in choppy or bearish conditions.
- Probabilities Over Predictions: Betting on an 85% probability of success beats making directional guesses.
- Risk Management is Non-Negotiable: Knowing—and sticking to—your risk parameters is what separates successful traders from the rest.
Trade Recap: UNH Bear Call Spread
- Underlying Stock: United Healthcare (UNH)
- Current Price: $501.89
- Expiration Date: March 28, 2025 (37 days away)
- Strategy: Bear Call Spread (Short Vertical Call Spread)
- Trade Details:
- Sell the 550 call
- Buy the 555 call
- Net Credit: $0.70, or $70 per spread
- Probability of Success: 85.17%
- Maximum Return: 16.3%
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