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Reverse Jade Lizard Strategy

Strategy Type:

Call Ratio Spread is a neutral to slightly bullish strategy. It's employed when an investor expects the underlying asset's price to remain stable or increase slightly.

Components: The strategy involves two main components:

  • Short Call Option: The investor sells (writes) one out-of-the-money call option with a specific strike price.
  • Long Call Option: Simultaneously, the investor buys two or more call options with a higher strike price. The number of long call options bought is typically greater than the number of short call options sold.

Profit and Loss Potential:

  • Maximum Profit:The maximum profit is limited. It occurs if the underlying asset's price increases moderately but remains below the strike price of the short call option. The profit is capped at the net credit received from selling the short call and buying the long calls.
  • Maximum Loss:The maximum loss is limited and occurs if the underlying asset's price rises significantly above the strike prices of the long call options. The loss is limited to the net debit (premium paid) when buying the long calls.
Break-Even Point: There are typically multiple break-even points based on the specifics of the options used. These points can be calculated based on the strike prices of the options.

Strategy Goals:

  • The primary goal of a Call Ratio Spread is to generate a net credit by selling the short call option, while the purchase of multiple long call options provides some upside protection
  • The strategy is suitable when an investor has a mildly bullish outlook and wants to profit from a modest price increase or a stable price.

Risk Management:

  • The risk is limited to the net debit (premium paid) when buying the long call options. This defines the maximum loss.
  • The strategy provides controlled risk with a limited profit potential.