Contents

CALL Ratio Spread

CALL Ratio Spread is a moderately bullish to neutral strategy. Ratio spreads are also known as front spreads. It involves Buying a CALL at a lower strike and Selling 2 CALLs at a Higher Strike to establish a net credit position. You might want to establish the strategy when the volatility is falling.

The strategy possesses unlimited risk and it is better to use this strategy on Index options as they are less volatile. Also, this strategy is more profitable closer to the expiry.

Trade Set-Up

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Buy a lower strike CALL

Eg: Buy a 10000 CALL

Naked Call 1-Finvezto

Sell 2 Higher Strike CALLs

Eg: Sell 2 10200 CALLs

short call-Finvezto

CALL Ratio Spread

Call Ratio Spread-Finvezto

Entry Checklist

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Market Outlook
  • Moderately Bullish to neutral outlook
  • Price should be below and moving down from the immediate resistance zone identified
  • Volatility
  • Initiate the position when the volatility starts falling
  • Strike Price
  • The farther you go away from the current price or spot price, the lesser the premium you will receive.
  • Choose strikes preferably above the resistance zone identified.
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is unlimited when the price shoots up above the resistance zone and keeps moving upwards
  • Reward [Profit]
  • Maximum profit is when the price ends near the strike price of the higher strike CALLs.
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is helpful for this strategy as long as price stays below the strike price of the higher strike CALLs.
  • Volatility impact [Vega]
  • A reduction in Volatility is helpful for the position when price stays below the lower strike CALL.
  • Increase in Volatility is harmful when price is closer to the strike price of the higher strike CALLs
  • 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 price shoots up above the resistance zone identified, then this strategy might put you at a huge risk. Hence, using stop loss to exit is vital.