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Call Ratio Back Spread Strategy

Strategy Type:

Call Ratio Back Spread is a volatility-based strategy. It's used when an investor expects a significant price movement but is unsure about the direction (up or down) of that movement.

Components: The strategy involves two main components:

  • Short Call Option: The investor buys a certain number of call options with a lower strike price (the strike at which they have the right to buy the underlying asset).
  • Long Call Option: Simultaneously, the investor sells (writes) a greater number of call options with a higher strike price (the strike at which they may be obligated to sell the underlying asset if the option is exercised).

Profit and Loss Potential:

  • Maximum Profit: The maximum profit is theoretically unlimited if the underlying asset's price rises significantly. The profit increases as the asset's price goes up.
  • Maximum Loss: The maximum loss is limited to the difference in strike prices minus the net premium received or paid for the options.
Break-Even Point: There can be multiple break-even points depending on the specifics of the strategy. Typically, the strategy has a lower break-even point equal to the lower strike price plus the net premium received and an upper break-even point equal to the higher strike price.

Strategy Goals:

  • The primary goal of a Call Ratio Back Spread is to profit from a significant price movement in the underlying asset, regardless of the direction.
  • The strategy is asymmetrical, with potentially unlimited upside profit if the asset's price rises significantly.

Risk Management:

  • The risk is limited to the net premium received or paid for the options.
  • The strategy offers protection against a significant adverse price movement as the long call options provide a hedge.