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Bear Call Credit Spread – Getting Over 60% Return on Cisco Corp (CSCO)

Updated: Aug 23, 2023

Here I want to talk about a bearish trade I did on Cisco Corp (CSCO) where, in just 21 days, I made a profit of over 60%. After analyzing the stock chart, on Thursday the 30th of March 2023 I made up my mind and went short on this underlying security.

At that time Cisco was trading in an uptrend around $51.50 and could identify a resistance level at $52 which I believe would hold in the short term. You can watch the video below to have a sneak peek into the trade.

Going Short on Cisco Corp (CSCO)

I created a Bear Call Credit Spread by purchasing 4 contracts of the 50 call options expiring on the 19th of May 2023 and selling 4 contracts of the 55 call options with the very same expiry date. The maximum risk on the trade was limited and equal to $1112 with a profit potential of $888, which was also the initial credit on the strategy. There was an outstanding risk/reward ratio of 80%.

The position offered protection on the upside with a breakeven point at $52.50. At the moment the trade was placed, Cisco was trading at $51.40. This increased the chances of success as I could even profit with the underlying security trading slightly upwards.

There were 50 days left on the call options building the position. As I had a bearish outlook on this stock in the short term, in my opinion this was enough time to be right on the trade.

After a couple of days, the underlying traded up reaching a high of $52.56, slightly higher than the breakeven point. That raised a warning for me as I had to watch the position closely to avoid it moving further into losing territory. On the other hand, with still 46 days left on the trade, I still believed the resistance point would hold and the stock would bounce back down in the following days.

Bear Call Spread Option Strategy

A Steep Move Down of the Underlying

On the 6th of April, the underlying started trading down again closing at $51.27 and, in the following days, moved further down going in a comfortable place for my trade where I did not have to take any action whatsoever. From this point ahead, this position was making roughly $7 a day in profit thanks to the passage of time alone.

Then suddenly, the stock dropped substantially all the way down to $47. That’s a strong directional move downwards which was totally beneficial for the position. On Thursday the 20th of April - after being in the trade for 21 days - my Bear Call Credit Spread was closed with an outstanding profit of $720.

The steep downward movement of the stock was the key to reach this profit quicker as I did not have to wait to earn from time decay. At the moment the trade was closed, there were still 29 days left on the strategy. I could have decided to stay longer in the trade to collect more profit, but I decided that was not worth the risk for only $160 extra of profit I could make.

I’ll see you in the next release of the options trading diary.

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