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Call Backspread
Or
Reverse Call Ratio Spread
This strategy is adopted by traders who are bullish in nature. He
expects market and volatility to rise in the near future. A trader need not be
direction specific here (i.e. an upward or downward trend, but a small bias towards
an uptrend should always be present, as the gains will be much higher once the
market moves up rather than market moving down and keeping premium as income.
This strategy involves buying of 2 OTM Call Options and selling 1 ITM
Call Option.
The call backspread (reverse call ratio spread) is a bullish strategy in
options trading that involves selling a number of call options and
buying more call options of the same.
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In addition, the further the strikes are apart, the easier it will be to
establish the strategy for a credit. But as always, there’s a trade off.
Increasing the distance between strike prices also increases your risk, because
the stock will have to make a bigger move to the upside to avoid a loss.
Breakeven Point There are 2 break-even points for the call backspread position. The
breakeven points can be calculated using the following formula.
Upper Breakeven Point = Strike Price of Long
Call + Points of Maximum Loss
Lower Breakeven Point = Strike Price of Short
Call
Risk: Limited
Reward: Unlimited
Action
Sell 1 ITM Call Option
Buy 2 OTM Call Options
Example
Suppose NIFTY is trading around 11900 levels, Mr. G is bullish on the
market and the volatility. He will apply Call Backspread Strategy.
He will sell one 11800 NIFTY ITM Call Option for a premium of Rs. 165
& buys two 12000 NIFTY OTM Call Options at a premium of Rs. 50 each.
Breakeven Point Two Breakeven Point is 11865 and 12135.
Image by - sensibull.com
Result 1: At expiry if NIFTY closes at 12300, then Mr.
G will make a profit of Rs. 12,375.
Image by - sensibull.com
Result 1: At expiry if NIFTY closes at 11700, then Mr.
G will keep the premium amount received from sale of 11800 NIFTY ITM Call
Option. His net gain will be Rs. 4,875. [{165-(50*2)}*75]
Image by - sensibull.com
Result 1: At expiry if NIFTY closes at 11950, then Mr.
G will make a loss of Rs. 6,375.
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