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Call Backspread Option Strategy

Call Backspread Option Strategy is called as a Ratio Spread referred to as compilation when the strategy results in a net credit. It is made up of a short ITM call and long two OTM call options. A Backspread looks like a Long Straddle except for the payoff out on the downside. The payoff is like a long type of position and as a short strategy. Here if you receive money for the position upfront it is called a Short position and when you pay for a position it is called long. They are implemented by selling one in the money call option and buying two out of money call underlying assets with the same expiry. The strike price is customized as per the convenience of the trader. When the strike is further it is easier to establish the trade for credit but reduce the probability of stock reaching the strike price. It can be compared with a put ratio backspread which is bearish and use put instead of call. There are many calls purchased and sold. This strategy has an unlimited upside profit because the trader is holding more long call options than a short one.

The investor using a call ratio backspread invests the strategy that would sell fewer calls at a low strike price and buy more calls at a high price. Backspread strategies are designed to get benefit from trend reversal or moves in the market. The call ratio backspread gets benefits greatly from a rally in the underlying security. The goal is for underlying to rise above the price of the purchased call option. The price needs to go high enough to compensate for any premium paid for the call option.

Breakeven

The Lower breakeven is the same as the strike price of the short call. The upper breakeven is equal to the addition of strike price of long calls and point of maximum loss.

Example

The backspread is executed by selling a 50 strike price call for $3 and buying two 55 strike price calls for $1.50.Then the trader will be able to put the trade at zero out of pocket cost. If the stock stay below $50 at the expiration trader will breakeven both options worthless. If the stock trades to $55 is at a lower strike price call that would be $5 in the money. So while the 55 strike price calls is over out of the money. Investor’s loss a full $5if the stock traded to $70.The trader loses $20 on 50 strike price call and profits $15 on both 55for a total profit of $10.

Conclusion