Call Ratio Spreads or Short Ratio Call Spreads are a Ratio Spread strategy created by selling more call Options than are bought. Normally the ratio is two Short for one Long (2:1) but other ratios are possible also.
Call Ratio Spread strategies are limited profit and unlimited risk because they are net Short (i.e more sold than bought). Call ratio Spreads are considered less risky than naked Short calls and short straddles because the long option helps to reduce losses.
Call Ratio Spread strategies are Bearish because the sold calls become cheaper to buy back as the price of the Underlying decreases, however, they are less directional than selling naked calls. If the price moves higher, the upper side is protected. Call Ratio Spreads have similar characteristics to Broken Wing Butterfly strategies, unlike that strategy, however, they are risk undefined (but can also be more profitable).
As with many Short Options strategies, ratio Spreads are Volatility Bearish and are more likely to profit if Volatility contracts after the position is opened.
Long Call Ratio Spreads (or Back Spreads) are the inverse of Short Ratio Call Spreads and use ratios where there are more Long Options purchased than there are Short ones sold. These are used when the trader is Bullish about Volatility.
See the Profit & Loss diagram of a Long Call at OptionCreator
Example
XYZ is trading at 216
Short 2 x Out Of The Money Calls at 218 Strike for 5.56 credit
Long 1 x In The Money Call at 215 Strike for (-4.22) debit
Net credit received to enter trade: 1.34
XYZ remains at 216 at expiration
Short 2 x Out Of The Money Calls at 218 Strike expire worthless = 5.56 profit
Long 1 x In The Money Call at 215 Strike expires at 1.35, minus 4.22 to open trade = (-2.87) loss
Net profit = 2.69
XYZ increases to 224 at expiration
Short 2 x Out Of The Money Calls at 218 Strike expire at 12 minus (5.56) initial credit = (6.44) debit
Long 1 x In The Money Call at 215 Strike expires at 9, minus 4.22 to open trade = 4.78 credit
Net loss = (-1.66)
Contributed by: Ralph Windsor
Call Ratio Spread strategies are limited profit and unlimited risk because they are net Short (i.e more sold than bought). Call ratio Spreads are considered less risky than naked Short calls and short straddles because the long option helps to reduce losses.
Call Ratio Spread strategies are Bearish because the sold calls become cheaper to buy back as the price of the Underlying decreases, however, they are less directional than selling naked calls. If the price moves higher, the upper side is protected. Call Ratio Spreads have similar characteristics to Broken Wing Butterfly strategies, unlike that strategy, however, they are risk undefined (but can also be more profitable).
As with many Short Options strategies, ratio Spreads are Volatility Bearish and are more likely to profit if Volatility contracts after the position is opened.
Long Call Ratio Spreads (or Back Spreads) are the inverse of Short Ratio Call Spreads and use ratios where there are more Long Options purchased than there are Short ones sold. These are used when the trader is Bullish about Volatility.
Call Ratio Spread
See the Profit & Loss diagram of a Long Call at OptionCreator
Example
XYZ is trading at 216
Short 2 x Out Of The Money Calls at 218 Strike for 5.56 credit
Long 1 x In The Money Call at 215 Strike for (-4.22) debit
Net credit received to enter trade: 1.34
XYZ remains at 216 at expiration
Short 2 x Out Of The Money Calls at 218 Strike expire worthless = 5.56 profit
Long 1 x In The Money Call at 215 Strike expires at 1.35, minus 4.22 to open trade = (-2.87) loss
Net profit = 2.69
XYZ increases to 224 at expiration
Short 2 x Out Of The Money Calls at 218 Strike expire at 12 minus (5.56) initial credit = (6.44) debit
Long 1 x In The Money Call at 215 Strike expires at 9, minus 4.22 to open trade = 4.78 credit
Net loss = (-1.66)
Related Directory Entries
Featured Video View All
Call Ratio Spreads with NSE Options
XpertOptions.com explain the theory behind Call Ratio Spreads.
External Links
Short Ratio Call Spreadhttp://www.optionseducation.org/strategies_advanced_concepts/strategies/short_ratio_call_spread.html
OIC guide to short call ratio spreads.
View OIC Options Glossary in Options Market Glossary Directory
Call Ratio Spreadhttp://www.theoptionsguide.com/ratio-spread.aspx
General article on ratio spreads that makes specific reference to Call Ratio Spreads.
View Options Guide Strategy Finder in Options Market Glossary Directory
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