The long-awaited resolution of the symmetrical triangle (i.e., either the continuation of a trend or instead a reversal) in the SPDR S&P 500 (NYSE:SPY) has arrived.

Unfortunately, it wasn’t in the direction the bulls were hoping for.

With Thursday’s distribution day breaching the lower trend line of the triangle, we could say the bears were crowned the victor of the recent market stalemate. As a result, many of the stocks that were forming quality bases and poised on the cusp of breakouts are now fighting for the survival of their uptrends.

Given this bearish turn of events, it may be prudent to more proactively seek bearish setups. The bear-call spread is one strategy that is becoming increasingly appealing in this environment, as a way to participate in the market action without putting a lot of money on the line.

The bear-call spread consists of selling a lower-strike call option while buying a higher-strike call in the same expiration month. Think of it as a more-conservative, limited-risk alternative to selling naked call options outright. (In other words, trading a call spread is the only sane way to sell calls when you don’t own the underlying shares.)

You’ll enter a bear-call spread position for a net credit – in other words, you get paid right away to enter your trade – and this credit represents your maximum reward.

Your maximum risk is limited to the distance between the strike prices minus the net credit. (Whereas if you simply sold a call, your risk would be unlimited – which is something you don’t want to do in any market, especially a rough one like this.)

With the SPY now trading at $123, suppose we believe the path of least resistance at this stage is sideways-to-down. To capitalize on this viewpoint, we could enter a December bear-call spread by “selling to open” the SPY Dec 129 Call and simultaneously “buying to open” the SPY Dec 134 Call for a total net credit of at least 75 cents.

At current prices, you can sell the $129 call for a credit of $1.35 and buy the $134 call for a debit of 35 cents, giving you a net credit of $1 per share (or $100 per contract) on this trade.

If you collect 75 cents, your max reward would be capped at $75 and realized if the SPY remains below $129 by December expiration. The max risk comes out to $425 ($5 difference between the strike prices – 75 cents collected) and would be incurred if the SPY rose past $134 by December expiration.

Source: MachTrader

At the time of this writing Tyler Craig had no positions on SPY.