If you've understood the Vertical Call Debit Spread post, you are ready for the Vertical Call Credit Spread. The mechanics are the same: a simultaneous purchase or sale, ITM or OTM, for the same market price. Where the Vertical Call Debit Spread was a purchase of a ITM call and sale of a OTM call, the Vertical Call Credit Spread is sale of a ITM call (lower than the current price) and purchase of a OTM call (greater than the current price).
Let's look at the individual components of the trade, and the graph of the spread:
From the graph, we can identify that we maximize our profit when the market price of the stock is ITM, or lower than the original market price. Our bearish assumption, non-coincidentally, coincides with the alternate name for the vertical call credit spread: bear call spread.
Profit: The maximum profit we can obtain from this trade is equivalent to the premium collected from the sale of the ITM call.
Loss: The loss is still capped. In the case of the vertical call credit spread, however, it is equal to the difference between the ITM and OTM prices and the premium collected. In the graph's example this is: ($40.00-35.00)x100 minus the premium ($2) x100.
Eighteen-year old trader, future connoisseur of options.
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