Anticipations
A downward move in the underlying asset, but the extent of the move is uncertain.
Characteristics
Limited profit / limited loss.
Max profit - limited to the net credit received.
Max loss - difference between the strike prices less net credit received.
Creating
Sell a call option and buy a call option with a higher strike.
Example
Security(IBM) price - $100
Short 1 IBM 90 Call - $12.8
Long 1 IBM 100 Call - $6.5
Max profit = $(12.8 - 6.5) * 100 = $630
Max loss = $[(100 - 90) - (12.8 - 6.5)] * 100 = $370
Option Position at Expiration
Comments
If a fall in implied
volatility is expected:sell ATM call / buy OTM call
If a rise in implied
volatility is expected:sell ITM call / buy ATM call.
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