What is a Call Ratio Backspread?
The call ratio backspread is an investment strategy that involves selling a call at one strike price at a lower rate and then purchasing two calls at a higher strike price. This approach provides the call ratio backspread with a built in hedge component that is very likely to result in breaking even for the investor, and possible even realizing a small profit. Because the basic process for the call ratio backspread requires coupling a sale of one call at a low strike price while buying two new calls at higher strike prices, the investor incurs very little risk. In the event that the market conditions tend to not move in the anticipated direction, the worst case scenario for the investor is likely to be realizing no profit from the venture. However, the call ratio backspread also makes it probable that the trade will not result in a loss under any circumstances. Thus, the investor essentially has nothing to lose from utilizing the call ratio backspread, but does stand the chance to make
A call ratio backspread is a good strategy if you have a strong conviction that the security you are buying options on will have a strong upside move. Basically, the call ratio backspread is inverse to the call ratio spread in that you are shorting ITM call/s and buying OTM calls. This options strategy calls for a greater number of OTM calls than ITM calls, all of the same expiration month and underlying security. This strategy is a low risk, unlimited reward strategy that has the expectation of strong upside movement before options expiration. The goal when initiating this position is to create it with a small debit, or even a credit if possible. Call Backspread Risk Characteristics As you can see, once the call ratio spread breaks above the breakeven point (b2*), the profits become unlimited. Conversely, a move below the short call strike will limit your losses to the net debit paid to put the transaction on. If a net credit was received to put the transaction on, a move in the under
