In this post we will discuss options strategies that is Call ratio back spread, It is very helfull for Options Seller, There are several other strategies like Bull Call Spread, Bull Put Spread, Call Ratio Back Spread, Bear Call Ladder and so on. So let’s start.
By trading in Options either stock Option or Index option you can earn money by two ways either by buying the options or writing the options, but in the post we will mostly focus on top Options writing strategies.
Spread Options Strategies
Spread are multileg strategies involving 2 or more legs, where you buy and sell the options, we can categorize them in Bull call spread, Bull put spread, Bear call spread and Bear put spread, so let’s discuss them one by one.
Call Ratio Back Spread Options Strategies
As we discussed in previous article about bull call spread and bull put spread option strategies, which will give you limited profit with limited risk, but call ratio back spread is a strategy where you can get unlimited profit if the market goes up.
If the market goes down then in this option strategy you will get limited profit, and you will only get loss if the market goes range bound
It is a 3 leg strategy where we buy two OTM (Out of the money) call and sell one ITM (in the money) call option.
It is a classic 2:1 combo, which means buying two call options and selling one call options. You can execute is with multiple ratios like buying 4 call options and selling 2 call options and so on.
Implementation:
Buy two lot of OTM (Out of the money) call options
Sell one lot of ITM (in the money) Call Options
Conditions: All these options belongs to same expiry, same underlying and ratio is maintained like 2:1, 4:2, 6:3 so on.
Example:
Suppose Bank Nifty spot price is 41500, We have bought 2 OTM (Out of the money) call option of 41700 at the price of 75, and shorted one ITM (in the money) call option of 41400 at the price of 270
Now we will check different scenario
If Bank Nifty expires at the level of 41400
The intrinsic value for the call 41400 would be 0, therefore we will get all the premium of 270
On the other side we will lose the premium of 41700 call.
Therefore our total profit would be = 270-(2*75)=120
If Bank Nifty expires at the level of 41200
The intrinsic value for the call 41400 would be 0, therefore we will get all the premium of 270
On the other side we will lose the premium of 41700 call.
Therefore our total profit would be = 270-(2*75)=120
If Bank Nifty expires at the level of 41700
The intrinsic value for the call 41400 would be 300, and we have short the option therefore
Payoff would be 270-300=-30
On the other side we will lose the premium of 41700 call.
Therefore our net loss would be = 30+(2*75)=180
If Bank Nifty expires at the level of 42000
The intrinsic value for the call 71400 would be 600, and we have shorted the option therefore
Payoff would be 270-600=-330
On the other side the intrinsic value for 41700 call would be 300 and we have bought 2 call that is 600(300+300)
Therefore payoff for 41700 call would be 600-(2*75)=450
Hence our total profit would be = 450-330=120
Conclusion:
Spread = Higher Strike – Lower Strike
Net Credit=Premium received from lower strike price-2 * premium paid for higher strike price
Max loss= Spread – net credit
Maximum loss would be at = Expiry at higher Strike
When market goes down payoff would be= Net Credit
Upper Breakeven= Higher Strike- Max loss Lower Breakeven= Lower Strike +net Credit
Nirmal is a NISM Certified Derivative Trader & the Founder of InvestandEarn.net (Financial Blog). He entered the world of Equity research to explore his interests in financial markets having 5+ Years of Experience in Share Market Trading & Investing. Nirmal frequently writes about Share Market Trading & Investment and publishes his personal view on the market. Drop him a mail at nirmal.jaysval@investandearn.net.
