Call Ratio Backspread Option Strategy - Rating ★★★★ - YouTube

the call ratio back spread option strategy the call ratio back spread is a

bullish option strategy and the reverse of the ratio call spread whereas a

standard ratio spread seeks to profit from neutral market conditions back

spreads are best suited to a volatile market that is where large price moves

are expected so what's a back spread our back spread is simply a credit spread a

ratio back spread is where you're selling in the money calls and buying a

greater number of Cheaper out-of-the-money calls we could

summarize the differences this way a call spread is a debit spread with an

equal number of option contracts at different strike prices a call back

spread is a credit spread with an equal number of call option contracts at

different strike prices a call ratio back spread is structured the same way

as a credit spread except that you're buying more out of the money options

then the in the money options that you're selling this means that you sell

a lesser number of calls at a lower strike price and you buy more at a

higher strike price coming up we'll look at a typical 1 to 2 ratio example but

you can vary it by trying other ratios such as 2 to 3 or 3 to 5 which ratio you

choose may depend on the implied volatility in the option strikes that

you're using so call ratio back spread advantages and disadvantages

the appealing thing about this strategy is that it involves limited or even zero

downside risk when compared to just buying call options alone but it has

unlimited potential profit to the upside placing these trades on strong

uptrending stocks or ETFs will increase your chances of success another

advantage is the cost since this is a bullish tragedy and your aim should be

to put these on for a credit the cost of entry is less than just buying a long

call if held until expiration date a profit will be observed when the trading

price of the underlying is greater than or equal to twice the difference between

the strike prices of the short and long poles plus the initial premium received

if applicable because you're relying on a significant

move in the price of the underlying stock or ETF to profit the ratio back

spread is best created using options with about a hundred and eighty days to

expiration this gives them time to do their work as it's unlikely that any

stock or index will remain within a tight range over a six month period it

is for this reason that some have called them vacation spreads because you can

literally take a holiday and come back later and take a profit you also don't

need to hold them until expiration date if they're showing an acceptable profit

in a shorter time then take it break even points looking at the upcoming risk

graph you'll notice that there are two break-even points the upper and lower

break evens at expiration are the strike prices of the short and

long calls so let's now look at a ratio back spread example

let's say we're looking at a chart of Verizon in November 2017 and we noticed

that over time the price is fallen to a strong weekly support level we want to

take advantage of a potential price upside reversal at a time

when April 2018 out of the money call options have a lower implied volatility

than the in the money calls the current stock price is $43 but looking at the

weekly charts we believe that within six months it could easily climb as high as

$60 so here's what we do first of all we sell one in the money April calls with

$40 strike price and then we buy two out of the money

April calls with a $45 strike price the positions are entered for a small credit

overall this is where the call ratio back spread gives an advantage over

buying single long calls because if the stock should continue to fall instead of

rising as we hope the initial credit will provide a small profit whereas a

single call would show a loss looking at our payoff diagram the following

scenarios then apply let's say that we let it run until expiration date in

April and the stock price hasn't moved much and is now trading at $45 the $40

sold calls will be $5 in the money while the $45 board calls will be at the money

in this worst-case scenario because we've held it all the way until

expiration date since our salt calls are losing $5 and our bought calls are at

zero profit we realize our maximum loss of $500 but if we were able to realize

an initial credit upon entry this credit would offset the maximum loss

however should the stock rally 250 dollars by expiration date all options

positions will be in the money the $40 short options will have $10 of

intrinsic value while the $45 long options will have $5 of intrinsic value

since we have twice as many long $45 calls as we sold we will break even but

if we receive to credit upon entry we will make a small profit above the $50

mark our position begins to make a profit so if we reached our target of

$60 in 5 to 6 months time our profit will be $1,000 less commissions plus any

initial credit received but we don't have to wait until expiration date if

the positions are showing an early profit we can choose to walk away notice

the pink line at entry date in contrast to the blue expiration line there may be

plenty of time before expiration to take some profit but what if the stock price

should continue falling should this happen there will be zero loss because

it cost us nothing to enter the positions using varying ratios

particularly a point 6 7 ratio that is sell to and buy 3 we can usually bring

in an initial credit so that should the stock price move down instead of upwards

we will still make a small profit being our initial credit not only so but we

can also experiment with varying strike prices the closer the strike prices the

less movement you need in the underlying in order to profit

so there it is we've shown using a very simple example how if we have a bullish

view of the market the call ratio back spread is superior to buying simple long

call positions. Call ratio backspread option strategy.