Call Ratio Backspread

There is no doubt the Call Ratio Back Spread is one of the most exciting option strategies available. Imagine being able to take up a bullish position in a volatile stock or indices and have unlimited profit potential on the way up and also profit should the price fall down. Of course there is some risk and we shall be discussing this.

Call Ratio Back Spread

Back spreads profit when the underlying stock breaks out to upside or downside and loses money when the stock moves sideways.
This is what happens with the Call Ratio Back Spread, a volatile options strategy.

Call Ratio Back Spreads are credit spreads, meaning margin will be required. The Call Ratio Back Spread has unlimited profit potential when the stock breaks out to upside and limited profit, the credit received on opening the position, potential when the stock breaks out to downside, opening up one direction for unlimited profit.

We shall now cover how Call Ratio Back Spreads work, how to use it, when to use it and the pros and cons.

A bullish strategy.

The Call Ratio Back Spread is a volatile options trading strategy. It can profit either upwards or downwards. Call Ratio Back Spreads can be better understood as a strategy which still makes a limited amount of money even if the stock goes down strongly. It makes an unlimited profit if the stock goes up and a small profit if the stock goes down. However it loses money if the stock stays still. The Call Ratio Back Spread empitomizes the versatility and flexibility of ratio spreads, creating unique options trading risk/reward profiles.

How To open a Call Ratio Back Spread.

The Call Ratio Back Spread involves writing (sell to open) at the money call options and buying (buy to open) out of the money call options.

Because at The Money (ATM) call options cost more than out of The Money (OTM) call options, a lesser number of In The Money (ITM) call options is needed to cover the cost of the OTM options while still gaining in value slower than the OTM options when the underlying stock rises.

The ratio of long and short call options used is either 2:1 or 3:2 respectively. A common ratio is the 2 : 1 ratio spread where you sell to open 1 In The Money (ITM) call option for every 2 At The Money (ATM) or Out of the Money (OTM) call options that was bought.

When To Use Call Ratio Back Spread.

One should use a Call Ratio Back Spread when one is confident in a strong rise in the stock, wishes to profit from that rise without any upfront payment and not lose any money should the stock fall.

Profit Potential of Call Ratio Back Spread :

The Call Ratio Back Spread has an unlimited profit potential to upside and will keep making more profit as long as the underlying stock keeps rising. It also has limit profit potential to downside and will make the net credit as profit if the stock drops below the lower breakeven point.

Risk / Reward of Call Ratio Back Spread:

Upside Maximum Profit: Unlimited

Maximum Loss: limited to when the underlying stock closes exactly at the strike price of the Long Call Options.

Downside profit: Limited to credit received when position is opened.

Pros of this spread.

You receive a credit for opening this strategy. How good is that.
Credit received on opening is downward profit potential.
Profit to upside is theoretically unlimited.

Cons of this spread.

Spread is a level 4 (credit) trade. Brokers must approve this trade on your account first.
Margin is required.

Closing the position before Expiration.

1. If the position heads north into profit simply close position by buying back sold calls and sell bought calls back to the market simultaneously.

2. Should the position fall into downward credit :
A) Let all call options expire worthless or
B) Close out position for profit if near sold calls.

Disclaimer
It should be noted this is a level 4 trade and only experienced options trader`s are permitted by broker`s to place this trade.
A certain level of options trading and understanding is required for this trade.

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