Options Academy
Bear Spreads 102: Strike Selection (Aggressive vs. Conservative)
Should you go for the big credit or the high probability win? We analyze the trade-off between "Intrinsic Value" and "Time Value" in bear spreads.
The Trade-Off
Just like bull spreads, bear spreads come in different flavors based on strike selection.
You can aim for a "Large Credit" (Aggressive) or a "Small Credit" (Conservative).
1. Aggressive: The Large Credit Spread
Structure: Stock is ABOVE the lower strike. (e.g., Stock $35, Sell $30 Call / Buy $35 Call).
Pros: Huge potential profit (Credit is large).
Cons: Stock MUST drop significantly for you to keep that credit.
Why it's risky: You are selling an ITM call. ITM calls have less "Time Value" and more "Intrinsic Value". As an option seller, you generally want to sell Time Value (which decays), not Intrinsic Value (which you have to pay back unless price moves).
Verdict: Low probability, high reward.
2. Conservative: The Small Credit Spread
Structure: Stock is BELOW the lower strike. (e.g., Stock $25, Sell $30 Call / Buy $35 Call).
Pros: High probability. You win even if the stock stays flat or rises to $29.
Cons: Small profit (Credit is small, e.g., $0.50).
Why it works: You are selling OTM calls which are 100% Time Value. You benefit from Theta decay immediately.
Verdict: The preferred strategy for income traders.
Key takeaways
- Large Credit spreads require the stock to drop (Directional bet).
- Small Credit spreads profit from Time Decay (Neutral/Bearish).
- Selling OTM calls (Small Credit) aligns better with the "Seller's Edge" of harvesting time premium.
Series
Bear Spread Masterclass
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