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Call Ratio Back Spread Option Strategy

Call Ratio Back spread Option Strategy

What is Call Ratio Backspread Option Strategy?

  • Call Ratio backspread is an extremely bullish strategy that expects high volatility in underlying, Call Ratio Backspread works well if we have bullish as well as bearish view but biased towards bullishness. This is similar to Straddle except the payoff is flat on the downside. Traders can make profit too if the market falls, but make higher profit if the market rallies sharply.

When to Execute?

  • Call Ratio Backspread can be devised when we are extremely bullish on the market as well as expecting high validity. Call ratio Backspread also provides downside as we have defined loss or profit.

What is the Trade?

  • Under Call Ratio Backspread we’ll Sell One lot of At-the-money (ATM) Call and Buy 2 lots OTM (Out-of-Money) call. Net cost to establish the strategy is very low.

What will be maximum profit?

  • Call Ratio Backspread maximum Profit is undefined if stock rallies above the higher breakeven and limited if fall drastically.

What will be maximum loss?

  • Maximum loss is the difference between the strike plus net outflow or less net inflow.

What are the advantages?

  • Reduced cost of formulating the strategy. In scenarios where implied volatility of call is rising, it provides limited risk. Generates higher return in scenarios where stock gives exponential return.

What are the disadvantages?

  • Loss could be higher if the stock doesn’t give desired move. Not meant for an intermediate trader. Time decay could be harmful to the strategy as we are net long. Strike selection becomes key to success.

Example for Call Ratio BackSpread:

  • Nifty future price is 15500. A Call Ratio Backspread can be devised by sell one lot of 15500 Call At-the-Money (ATM) @95 and selling two of 15700 CE (ITM) @ 30. Net Premium Paid or Received = Rs. (+35). Maximum profit undefined above 15780. Profit is defined below 15530. Maximum loss is at 15700.