Tim Olson
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1.7 KiB
1.7 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A strongly bullish volatility strategy selling fewer near-ATM calls at K1 and buying more OTM calls at K2, with unlimited profit on a strong rally and limited loss in between. |
|
Call Ratio Backspread
Section: 2.36 | Asset Class: Options | Type: Volatility
Overview
The call ratio backspread consists of a short position in N_S close to ATM call options with strike K1, and a long position in N_L OTM call options with strike K2 (K2 > K1), where N_L > N_S. Typically N_L = 2, N_S = 1 or N_L = 3, N_S = 2. The trader's outlook is strongly bullish. This is a capital gain strategy.
Construction
- Sell N_S call options at strike K1 (near ATM)
- Buy N_L call options at strike K2 (OTM, K2 > K1, N_L > N_S), same expiry
Net debit or credit H
Payoff Profile
f_T = N_L × (S_T - K2)+ - N_S × (S_T - K1)+ - H
- Lower breakeven (if H < 0, net credit): S*_down = K1 - H/N_S
- Upper breakeven: S*_up = (N_L × K2 - N_S × K1 + H) / (N_L - N_S)
- Max profit: P_max = unlimited (above the upper breakeven)
- Max loss: L_max = N_S × (K2 - K1) + H (in the zone near K2 where long calls are OTM but short calls are ITM)
Key Conditions / Signals
- Strongly bullish; expects a significant rally above K2
- Ideally entered as a credit (H < 0) so that profit is also made if stock stays below K1
- Loss zone is bounded between the two breakevens
Notes
The difference between call ratio backspread and ratio call spread: here N_L > N_S (more longs than shorts). The maximum loss occurs near K2 at expiry. If H < 0, the position profits if the stock stays well below K1 or surges well above the upper breakeven.