Contents

CALL Ratio BackSpread

CALL Ratio Backspread is a bullish strategy used in a highly volatile scenario. It involves Selling a CALL at a lower strike and Buying 2 CALLs at a Higher Strike.

You can visualize this strategy as a Bear Call Spread plus an OTM Long CALL. This strategy works even when you get the prediction completely wrong if you set it up as a net credit position. That is, if the premium received by Selling the lower strike CALL is more than the premium paid to buy the higher strike CALLs, then it is a net credit position. Even if the price falls significantly, you will profit. If price shoots up, your profits are theoretically unlimited.

The strategy is ideal to be used as a positional trade. The more time you give for the stock or index to move the better. If you are trading this strategy in the short term, then you can use it before company results are announced and if your view is bullish. If the stock price falls, you might still profit if you set up the strategy as a net credit strategy.

Trade Set-Up

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Sell lower strike CALL

short call-Finvezto

Buy 2 higher strike CALLs

Naked Call 1-Finvezto

CALL Ratio Backspread

Call Ratio Backspread-Finvezto
Trade Set-Up
  • Sell a lower strike CALL for high premium
  • Buy 2 higher strike CALLs for low premium
  • Ensure the premium received from the sold CALL or Short CALL is more than the premium paid for the 2 bought CALLs or Long CALLs. You are creating a net credit position.
  • Margin Requirement
  • Margin is Required as it is a net credit position.
  • The margin required for spreads have come down significantly since June 2020 in the Indian stock market. This strategy is basically a Bear CALL spread plus a Long CALL.
  • Entry Checklist

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    Market Outlook
  • Bullish Outlook on a highly volatile stock or index
  • Use on stocks which are going to announce results soon
  • Volatility
  • Initiate the position when the volatility is low and on the rise
  • Strike Price
  • Sell a CALL at At-the-Money strike
  • Buy the CALLs at a strike such that the double the premium of the CALLs should be the premium of the At-the-Money Sold Call. This is when you establish a 2x1 CALL Ratio Backspread.
  • Positional or Intraday?
  • Hold overnight positions only in near month or far month options as you will give more time for the stock to move. The decay overnight will also be less
  • When you are trading weekly options, hold only when you are sure if the price is going to make a big move upwards. Otherwise, you will become a victim of time decay if the stock doesn't move and stays in a range.
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is when the stock price ends at the OTM strike where you bought the 2 CALLs
  • Reward [Profit]
  • Maximum profit is unlimited if the stock shoots up
  • Break Even Point
  • There are 2 break even points. One on the upside and the other on the downside
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is harmful if the price shoots up
  • Time decay is helpful if the price falls down
  • Volatility impact [Vega]
  • Volatility is helpful as the price shoots up
  • Increase in Volatility is harmful if the price falls
  • Trade Management & Exit

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    Stop Loss & Exit
  • Stop Loss should be set in such a way that Risk is limited to 1-2% of your entire capital
  • If the stock stays between a support and a resistance, then you might be facing a loss. Move out of the position when the loss is about 1-2% of your capital