![Call Ratio Backspread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2Feeadc316edb11d3524e82145279f0fb466ef39fd-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Call Ratio Backspread
The Call Ratio Backspread strategy involves selling and buying call options in a specific ratio.
The Call Ratio Backspread is a somewhat advanced options trading strategy, primarily suited for traders who anticipate a significant move upwards in the price of an underlying asset. This strategy involves selling and buying call options in a specific ratio, typically selling one call option and buying two (or more) call options at a higher strike price.
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How It Works:
- Sell a Call Option: The trader sells a call option with a particular strike price.
- Buy Call Options: The trader buys more than one call option (usually two) at a higher strike price, both with the same expiration as the sold call.
Potential Profit and Loss:
- Maximum Profit: Unlimited. The profit grows as the underlying asset's price rises.
- Maximum Loss: Limited to the difference between the premiums paid and received. It occurs if the price of the underlying closes at the strike price of the call options purchased.
Benefits:
- Profit from Large Upward Move: This strategy can be very profitable if the underlying asset sees a significant increase in price.
- Break-even Point: Achieved when the underlying asset price equals the lower strike price plus the net cost of the spread.
Drawbacks:
- Risk of Small Upward Moves: If the underlying asset has a moderate rise, settling between the two strike prices, it can result in a maximum loss.
- Complexity: It's a more complex strategy than basic option strategies, and may not be suitable for beginners.
Example:
Imagine a stock Nifty is trading at ₹19,996:
- Sell 1 20000 call option for a premium of ₹365.
- Buy 2 20300 call options at a premium of ₹197 each.
Net cost: ₹29 (since you receive ₹365 and spend ₹394).
If Nifty rises significantly above ₹20,600, the profit potential is unlimited. If Nifty stays below ₹20000, the options expire worthless, and there's loss of ₹29 (net cost). However, if Nifty closes at ₹20,300 at expiration, the trader incurs the maximum loss of ₹327 (strike difference plus cost), which in this case would be the cost of the spread.
In conclusion, the Call Ratio Backspread is a strategy for the bullish trader who believes there's a chance of a strong upward move. It offers unlimited upside potential with a defined maximum risk, but requires a careful understanding of its risk-return profile.
Other Strategies
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Iron Condor
A strategy designed to profit from low volatility in the underlying asset, combining a bullish put credit spread and a bearish call credit spread to it.
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Iron Butterfly
This is a strategy which profits from low volatility in the price of the underlying asset while minimizing risk.
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Short Strangle
A short strangle is a non directional trading strategy where an investor sells an (OTM) call option and put option on the same underlying asset simultaneously.
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Short Straddle
A Short straddle is considered neutral or non-directional because it profits from minimal price movement in the underlying asset.
![Put Ratio Backspread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F35a902f089de4d28cb2b39c119f55cd041901f66-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Put Ratio Backspread
The Put Ratio Backspread strategy involves selling and buying put options in a specific ratio.
![Bear Call Spread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F02f788314292fe0bfaa65f78e65b76c18898fca4-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Bear Call Spread
A Bear Call Spread is an options trading strategy that's used when a trader believes the price of an underlying asset will go down, but not significantly.
![Bear Put Spread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F9da99c931c0384384512dd043530366d5102aaf1-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Bear Put Spread
A Bear Put Spread is a type of vertical spread strategy used in options trading.
![Long Put](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F0de73b57323f7d3d2eb98da84039c7f2b45971a9-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Long Put
Long Put option is the most basic & simplest strategy. It is recommended or implemented when we expect the underlying asset to show significant downside move.
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Short Call
Short Call strategy is employed in a bearish or neutral market outlook, where the underlying asset's price is expected to remain stable or fall.
![Call Ratio Backspread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2Feeadc316edb11d3524e82145279f0fb466ef39fd-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Call Ratio Backspread
The Call Ratio Backspread strategy involves selling and buying call options in a specific ratio.
![Bull Put Spread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F9743b7b35c7710fd4431bcc9dcf0dce422a50240-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Bull Put Spread
A Bull Put Spread is a type of vertical spread strategy used in options trading
![Bull Call Spread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F38bf8dd75f037f531c7372db168ab3196940bb58-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Bull Call Spread
A Bull Call Spread is an options trading strategy that's used when a trader believes the price of an underlying asset will go up, but not significantly.
![Short Put](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F0bec9cbb2091c514f837bfa744f628fd00931ff7-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Short Put
Short Put strategy is employed in a bullish or neutral market outlook, where the investor believes that the underlying asset's price will remain stable or rise.
![Long Call](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F9a6af45e1a4744061f846f8f00f00b0f97f34972-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Long Call
Long Call option' is the most basic & simplest strategy. It is recommended or implemented when we expect the underlying asset to show significant upside move.