Hi everyone, this is matt from match. Strats. If you have ever tried to grow a small trading account, you know it's much easier said than done. There are two main ways to go about this.

You could execute a high return play that has a considerable risk profile or you can focus on more of a slow and steady growth approach. I personally believe that there's a time and place for both of these styles in this video, i will be discussing an income strategy for smaller accounts. This option strategy, a bear, call spread, allows you to set a risk to reward ratio which is compatible with your trading style and account size after thoroughly explaining how this strategy works. I will provide you with a live example in my own robinhood account.

If you are new to the world of options trading or need a quick refresher, a link to an introductory video is on the top of the screen now. So what is a bear? Call spread? This strategy is created with two different option positions. First, you would sell a call option, then you would buy a call option at a higher strike price relative to the first. These two options would have the same expiration date when the options expire.

You would profit if the stock in question is below the strike price of the first option. I know the details of this strategy might seem a little murky. So let's cover an example to make things more clear. Let's say: you've been tracking a stock xyz and feel confident it will be below or stay below 75.

In a certain period of time, you could place a bear, call spread on xyz and profit. If your theory is correct to create the spread, you would sell a call option on xyz with a strike price of seventy five dollars. Let's say the premium for this option is three dollars and twenty five cents. Then you would buy a call option on xyz with a strike price of eighty dollars.

Let's say the premium, for this option is a dollar twenty. Five. Both of these options would have the same expiration date. In this example, you would be credited two dollars per share or two hundred dollars in total to create the spread, since the net premium is positive.

This strategy can also be referred to as a call credit spread awesome. Now you have a call spread, which is worth two hundred dollars. You may be asking what happens from here. Let's cover the three ways it could play out scenario.

One is when the options expire and xyz is at or below 75. In other words, your theory about xyz was right and you'll be rewarded with the maximum profit. The value of this return is easy to compute, since both call options are out of the money they are worthless. This means you would keep the premium given to you from the first option and you would lose the premium that was paid for the second option.

Hence the max profit is equal to the net premium from when you created the spread in this example. That would be two dollars per share or 200. Your profit is capped in the sense that this would be your return as long as xyz is at or below 75, even though your profit potential is limited. So is your risk, which brings me to scenario? Two scenario two would occur when the options expire and xyz is above eighty dollars.

Unfortunately, this means your theory about xyz was notably wrong and the maximum loss will be incurred in this situation. Both calls would be in the money to compute the max risk. You would subtract the net premium of the spread from the difference in strike prices. For this example, the strike price difference is five, and the net premium is two.

This means you would lose three dollars per share or three hundred dollars. In total, this loss would be suffered if xyz was trading anywhere from eighty dollars upwards, when the options expire. Now that you know both the max risk and the max return, let's discuss what happens in between those two values scenario: three is when the options expire and xyz is somewhere between 75 dollars and 80 dollars. This conclusion means you were wrong, but not really wrong.

When xyz is in this range, the first option is in the money, but the second option is out of the money. Therefore, the return spans from negative 300 to 200, as xyz goes from 80 to 75. The breakeven price is another easy computation. You simply add the net premium to the lower strike price.

In this example, you would break even when xyz is at 77, any value below 77 would be profitable, and any value above would be a loss. Overall, the entire risk to reward profile is known when you initially construct the spread. If you watch my previous bear put spread video, you may have noticed that the return profile looks the same as a bear call spread. This brings up the question.

What is the difference between these two strategies? They are very similar, but there are a handful of nuances. The main difference is that the bear call spread is created with a net credit and a bear put spread is created with a net debit. Typically, this means you need a stock to drop to profit with a bare put spread. On the other hand, a bear call spread is profitable if a stock drops or, if it trades sideways, which makes it a great candidate for growing a trading account.

I'm personally a fan of this strategy because it is very customizable. The strike price, location, difference and expiration date can all be altered to drastically change the risk to reward ratio. You can choose to take a lower risk play with a higher certainty of reward, or you can place a very risky spread and potentially get a massive return. I would highly suggest studying the impact of altering these values as a next step.

Now that we have covered all the theory it's time for an example in my own robinhood account, i decided to place a bear call spread on boeing. I picked this stock as the underlying, because i personally have a bearish outlook on it. To start, i selected an expiration date of may 1st to create the first leg of the spread. I sold a call option at 140, then to complete the spread.

I bought a call option at 145 dollars. The net premium for this spread appears to be around 0.78 or 78 dollars in total, as you can see, i successfully placed a bear call spread on boeing. I was credited 78 to create this position, which is also the maximum possible profit on the screen. Now are the other relevant values to this spread.

I am personally not a fan of this particular risk to reward ratio when applying the spread yourself. I would definitely look for better opportunities thanks for watching until the end, the support means a lot to me. I would truly appreciate it if you could hit the like button and leave a comment below it really helps with the youtube algorithm. I hope you enjoyed the video and wish you the best of luck with your trades and, as always, may the odds be in your favor.